For anyone moving locations or going into business for the first time, selecting the right commercial property is incredibly important to success. As you negotiate with landlords, learning how to calculate commercial rent amounts is essential to ensure you’re receiving fair value for your money.
No two commercial leases are alike because there are too many variables to consider. This guide will take you through the various types of commercial lease agreements and show you the importance of using a commercial lease calculator before signing a contract.
An Overview of Commercial Rent Calculations
Commercial properties are different from residential ones, where the landlord gives a price, and negotiations can be pretty minimal. A commercial building can serve many other purposes, so both sides of the deal will negotiate to ensure they’re getting fair value.
As a result, there are calculations involved with commercial rent quotes that often take the business’s success in that location into account. By learning how these calculations work before entering into a negotiation, renters can give themselves leverage and secure the best possible deal.
Factors to Consider in a Commercial Rent Quote
It’s vital that business owners not enter into a commercial rent agreement without considering some aspects that change the deal’s parameters. These factors can determine whether the property ends up working out and helping the renting organization grow or becomes a poor deal for the company.
- The Location
Any tenant should consider the location, mainly when opening a business that requires foot traffic or easy access for customers. A landlord might submit an outstanding commercial rent quote, but if the building doesn’t suit the company, the deal won’t work for either party. Getting to know the location is essential, especially when setting up in a new city or expanding into a new neighborhood.
- Average Rent in the Area
You’ll likely receive a quote from a landlord based on multiple factors, but learning the average rent in the city, or even the neighborhood, gives you a leg-up in negotiations. In Washington, D.C., the average commercial rent is $55.50 per square foot or $62 per square foot of Class A office space. If you receive quotes above those amounts, you could have room to negotiate a better deal.
- Rentable vs. Usable Square Footage
Some large buildings have multiple tenants, and in those situations, renters should know if the quote is based on usable square footage (USF) or rentable square footage (RSF). When calculating the cost of USF, only the space your business occupies factors into the equation. With RSF, the calculation involves taking the total square footage that tenants are using and dividing it by the property’s total square footage to come up with a percentage.
- Extra Fees
In some situations, the landlord adds maintenance, insurance, common area space, and other expenses into the agreement on top of the base rate. This format is called a triple net lease. There are full-service gross (FSG) and modified gross (MG) contracts, however, where these amounts factor into the base rent, providing the tenant with cost certainty.
All these factors help determine whether the quote you receive is workable in a rental agreement. However, it’s best to know how commercial rent is calculated before entering into negotiations to give yourself some leverage.
3 Ways to Calculate Commercial Rent
Generally, a landlord has three different options when calculating a commercial lease. The method used could depend on location, property class, or the type of business moving into the building.
1. By Square Footage
Perhaps the most common type of commercial lease calculation is by square footage. The landlord will present a cost per square foot in this calculation and multiply it by the size of the space. Rentable and usable square footage can also factor into these types of deals, depending on the property type.
2. As a Percentage Over Base Amount
A percentage over base amount agreement involves a tenant paying a monthly rental fee plus a percentage of gross receipts over a predetermined amount. For example, a business might pay a base rent of $2,000 per month and then an additional 5% fee on every dollar of gross income above $75,000 per month.
If the company’s gross receipts add up to $100,000 per month, the percentage over base amount would be 5% of $25,000 plus base, which equals $3,250 per month.
3. As a Percentage of Gross Business Receipts
When calculating commercial rent on a percentage of gross receipts, rent is paid based on all gross income. The amount is applied to all monthly income rather than the tenant paying 5% on receipts over $75,000. The tenant benefits because the base rent is usually lower with this type of agreement, but the amount paid to a landlord could be high during a busy month.
Make sure you’re aware of these three commercial rent calculation types before receiving your quote, and use that knowledge to negotiate what’s best for your company. For example, as a high-income business, it might be beneficial to pay a more expensive square footage amount, so you don’t have to give up a percentage of your gross income.
Speak With a Commercial Lease Expert in Washington DC
A lot goes into calculating commercial rent because a landlord could want a percentage of your gross receipts as part of the agreement. This situation isn’t always advantageous for commercial space tenants because the property owner could end up taking a large chunk of income, hurting your bottom line. It’s often best to hire a tenant representation service to ensure you’re getting a deal that will allow your business to thrive and grow in its new location.
The Genau Group offers tenant representation services to those seeking commercial property leases throughout the Washington, D.C., area. Our team will negotiate with your best interests in mind, ensuring you get fair value for your lease. Contact The Genau Group today for expert advice on D.C. commercial properties.