Understanding Rental Rates

Because there are a number of factors that comprise rents and several customary ways to quote rents, it can be difficult to understand what people mean when they are discussing leasing rates. Normally, the rate quoted reflects the amount of rent you pay per square foot. Generally square foot prices are quoted on a monthly basis, however, there are markets such as San Francisco that are quoted on an annual basis. By example, a $36.00 per square foot annual rate is equal to $3.00 per square foot when expressed as a monthly rate. While this is simple math, it can come as a bit of a shock when you hear a rate quoted for one space as $3.00 per square foot and another as $36.00.
The rate quoting style tends to vary: Urban office leasing is generally quoted as an annual rate, while industrial and retail are typically stated as monthly rates. Also important to note is that real estate brokers commonly refer to annual square footage rates while tenants frequently prefer to look at rates on a monthly basis. This difference may occur because each uses the rate differently. Tenants commonly look at their expenses from monthly expense perspective, while agents deal in leasing agreements in annual terms. Aside from different rental rate terms, there are key attributes associated with each square footage rate.
These attributes are most commonly referred to as: Full Service Gross, Industrial Gross (or Single Net), Double Net and Triple Net (or Absolute Net); all of these except the Full Service Gross rent may have Common Area Maintenance (CAM) charges added on. On property fact sheets you may see these written as; FSG, IG, N, NN, NNN, CAM. These attributes determine who pays the utilities , janitorial and other building services (elevators, common hall lights, etc.) and are key factors in determining the true asking rate.
Note: Retail tenants may also be subject to a percentage rent that requires the tenant to pay a percentage of the gross sales. Typically this kicks in after the yield of the percentage of gross sales exceeds a certain minimum rent.
Full Service Gross is generally associated with urban or multi-tenant office buildings indicating that the asking rate includes all the building services, utilities and janitorial, property taxes, insurance, and common area maintenance .
Industrial Gross (sometimes referred to as Single Net) is associated with office/warehouse and some small office buildings and this rate generally means that the tenant pays for its own util ity services, janitorial and trash removal, while the owner is cov ering the property taxes and insurance.
Net generally indicates what the asking rate does not cover. For example net of utilities and janitorial means that the tenant is, at a minimum responsible for its own utilities, janitorial, plus the base rent. I do not think there is anything about leasing that causes more confusion than the term Net because it is so often misused, even by otherwise competent brokers. So let me make this really easy for you and save you some real grief later. When you hear the word Net , think the word Not, or in other words, some thing is not included in the rent. You then need to ask this question: “Please tell me all the things I will be paying for that are not included in the rent.” This will be essential in comparing the final cost of leasing one property over another.
Double Net is a commonly used in retail leasing or with free standing, single tenant property. In this case, the tenant will pay for all the services, the taxes and insurance plus any systems maintenance while the owner will pay to maintain the roof, foundations and side-walls.
Triple Net (sometimes called absolute net) is also commonly used in retail leasing or with free standing, single tenant property. In this case the tenant will pay for all the services, the taxes and insurance plus any maintenance to the roof, foundations, side walls, and all building systems.
Common Area Maintenance charges are sometimes added to the quoted rate and most often found in industrial parks and smaller strip retail centers. Quoted on a square foot basis, they refer to the cost of maintaining the parking lot, sidewalks, land scaping, signs or any other asset used in common by the tenants.
Screening Potential Properties
Now it’s time to make some screening calls. There are two objectives in pre-screening property: decide which ones are worth the time to inspect and obtain written information and floor plans of the offering. Floor plans will help you see how well you might fit into a particular space or how it can be modified to meet your needs. Some web sites will have plans posted. You can also ask to have them faxed or emailed to you. Email is better for this purpose because it provides a better package, usually in color. Since your objective is to save time and effort, be prepared to leave a complete message when the party is not in. Ask for answers to all the questions you’ve ranked with a three and the highest pri ority two’s, ask that the floor plans and fact sheets be sent to you. Be sure to ask that this information be sent right away, as that will be a good gauge of the responsiveness you can expect later.
This is especially important when soliciting the owners directly. Naturally, you will want to set an appointment to see the properties that get high marks.
Before you begin any site inspections, it is important to under stand some basic concepts about commercial space. The first is that commercial space often needs to be modified to meet the needs of the tenant. Rarely do the existing conditions of space precisely meet the needs of the incoming tenant. Landlords anticipate this and are prepared to negotiate improvements for the tenant. How much you can successfully negotiate is a question of market conditions. Higher vacancy rates in a given market translate into more landlord contribution and conversely, very tight markets can put the responsibility to customize the space on the incoming tenant. Later we will discuss the space planning aspects of your transactions, but first we need to gain greater understanding of how commercial space is measured before we go out and start visiting available space.
