How to Calculate Commercial Rents Cost
The choice of a commercial lease is not limited to the choice of the property’s location, type, and size. The majority of people are confused by the rent calculation for commercial real estate and this is mostly because of the variables connected with it. Considerable attention should be paid to the rental fee you will be expected to pay if you sign a tenancy agreement. In fact, calculating the price for commercial property is a complicated task, because finally, the chosen workspace may cost more than you have expected to pay for it. In order to avoid multiple pitfalls connected with financial expenditures on rental, you will need to learn how to calculate rent per square footage.
The occupant’s ability to pay should be based on the revenues he gets from running a business in the area. It is also important to consider the type of workspace you rent. Thus, different commercial properties have different amenities on-site, and, therefore, cost more or less, depending on what they offer. Thus, the way how is commercial rent calculated for office spaces is completely different from how it is calculated for retail premises or other commercial real estate. As of 2022, the rent for CRE has seen the surge of up to 3% based on the location. The types of commercial lease may affect the rental rate too, so you need to be aware of various terms to define the most optimal variant for your budget.
If the rental conditions are favorable for a tenant, he will not likely change the location of a business unless more space will be required. For a landlord, it is important to capture a good tenant because it means at least several years of a sustainable rental income and a positive flow of cash. There are tenants who prefer renting the whole building, however, many opt for specific units to reduce their expenditures to the parts that they will use. As far as more often than not spaces may be combined or divided, commercial rents are calculated on a price-per-square-foot basis.
Calculate rent on commercial property
Commercial properties include shopping malls, professional offices, business centers, and other premises which are available for rent in mix-use and self-contained buildings. The gross lease which is expected to be paid for each of the aforementioned premises depends on the commercial space your company books and the type of lease agreement you sign with the landlord. In various states of America, rents for business space are quoted either on an annual or a monthly basis.
There are various ways to calculate price per square foot for rent.
Annual vs monthly rent
The owner of the commercial property will charge you a fee for the amount of space you use. Space that isn’t usable, but that you may still need to pay for, includes interior walls, hallways, and lobbies. The annual rent is calculated based on an equity of rentable square footage multiplied by each unit of usable square feet available. It is possible to calculate the commercial rent using the following formula:
Total square footage x Price per square foot = Annual rental rate
For instance, the price per sq. ft. for your office is 50$. The total square footage is 2500. Then, $50 x 2500 = $125 000 is a sum of money you will be expected to pay for a year of using your office space. Large businesses often find it easier to subscribe to this agreement as with a one-time payment, they can easily determine the annual profits during the turnover.
From this formula, it is not that difficult to define how much you will pay for a month.
Total annual rental rate:12 = monthly rental rate
Thus, based on our example, $125000:12 = $10417. This fee will be charged by the month, if you sign an appropriate tenancy agreement. Monthly payments are more beneficial for small and medium-sized businesses, and startups, whose business models are still uncertain. In case a business is downsized, it is possible to terminate the contract and the property owner compensates the security deposit. Usually, such contracts predict additional operating costs for using common areas. The tenants must handle these optional costs, but they can come up with an idea to sign an agreement where all the tenants are responsible for paying for the operating expenses and common area maintenance. Shared office spaces, which are aplenty in the USA, promote flexibility and adaptability of the workspace to tenants’ needs. Here, the occupants can pay for the workstations they use, and this fee is significantly lower than the one charged for a traditional serviced office space. Also called coworking suites, they usually accommodate professionals from various spheres, who are equally responsible for paying the bills for the communal areas and the utilities.
Percentage lease
The commercial lease calculation typically includes the base rent that is absolutely needed regardless of the type of commercial property leased. In addition to this, the landlord may require optional percentage payments, which depend on the gross income. This particular type of calculation is mainly used in retail space rentals. If the location of the property is a good one, it may bring lots of profits during hot seasons. Thus, it enables the tenant to pay higher rent. The percentage rate can be calculated in two ways: the percentage over the base amount and the percentage of gross receipts.
Percentage over the base amount
If you choose this type of payment, you will be expected to add a percentage of gross receipts to the base monthly rent over a certain base amount. How does it work? For example, you pay a sum of $1500 per month, and 5% of all gross receipts over $50,000 per month. If a monthly gross income is, for example, $65000, then your monthly rental may be calculated by the following formula: $65000-$50000=$15000x0,05=$750. So, a monthly rental payment will equal $1500(base rent)+$750 =$2250
Percentage of gross receipts
This rental predicts payments on all revenues from 0. If a tenant pays a base rent of $750 and 2% of gross business income, according to the formula, the monthly payment for the property (using the same numbers as above) will be calculated in the following way: $65000x0,02=$1300+$750(base rent)=$2050. With this option, tenants may count on the lower base rent.
The formula to use if calculating commercial rent with Excel
If you are still searching for the most optimal price per square foot formula - Excel may become a handy tool. A tenant may create a sheet where it will be possible to insert various criteria related to the rental, as well as sums of money that should be paid for a certain property, facility, or whatever else. These criteria may include such features as base rent, tenant improvements, free rent period, and duration of the lease. Besides, tenants may also write down discount rates if there are any available.
In Excel, a formula is an expression that operates on values in one cell or a range of cells. In CRE, such formulas allow users to understand how to calculate monthly rent for commercial property effectively. You will need to type the required formula into the cell or choose the one from the existing formulas. They may be applied to rows and columns. The simplest one predicts summing up the rates for the duration of the lease, or multiplying the monthly rate by 12. But Excel is suitable for conducting more complex calculations. Thus, you can calculate net effective rent by means of multiplying lease length with gross rent minus the free months discounted by your leaseholder. PV function is also common to calculations in the sphere of CRE. PV stands for present value. You can use this function to get the value in today's dollars of a series of future payments, assuming periodic, constant payments and a constant interest rate.
In order to determine the rental for commercial property, tenants need to be aware of many factors and issues. Using specific formulas and tools may be really helpful for calculating financial expenditures and, thus, planning the rental budget.
At MatchOffice, we know how to lease commercial properties at maximally favorable conditions. We continuously expand our database of tenants, and do our best to attract landlords to build efficient connections between the two main parts of the rental and leasing processes, offering them top-quality brokerage services.
