How To Calculate The Cost Of A Commercial Lease?

Finding a commercial space in the right location makes a huge difference in your business. However, when it comes to calculating the cost of the lease, you must consider several factors. 

Fortunately, the terms involved in this form of transaction are negotiable depending on the property and lease type, location, and governmental policies.

With knowledge of calculating the cost of a commercial lease, you can approach contract drafting with a strategic advantage. This enables you to craft an ongoing contract that would benefit both the tenant and the lessor. 

Discussed below are factors to consider for a simplified commercial lease calculation.

Different Types of Commercial Leases

It is common to find people daunted by the calculation of commercial leases due to the associated variables. However, identifying the different types of commercial leases makes the calculation easier. 

Commercial leases can be categorized into three main types. Here's a breakdown of what these leases mean to tenants and landlords.

Gross Lease

A gross lease property is a written agreement that covers all operating expenses. In such cases, the base rent for this lease is relatively high. The tenant's rent includes property taxes, maintenance, utilities, and insurance. So, these expenses are included in the gross lease and offset by the landlord from the tenant's rent.

Full service, or gross lease, offers tenants exclusive use of a property without having to be involved in the day-to-day operation of the building. It is important to note that, over time, this least type may incur additional expenses beyond the base rent. 

Net Lease

Unlike the gross lease, the net lease requires tenants to pay some or all property ownership and maintenance costs. These additional expenses include a certain percentage of the common area maintenance (CAM), insurance, and property taxes. This means the base rent is relatively lower compared to the gross lease.

As a result, the net lease is adjustable depending on the type of net lease. Net leases can be categorized into four types:

• Triple Net Lease
• Double Net Lease
• Single Net Lease 
• Absolute Triple Net Lease

Each type listed above has a specific level of financial obligations. So, there are no fixed financial requirements with a net commercial lease.

Modified Gross Lease

The modified gross lease offers a middle ground for both landlords and tenants. This lease form is quite flexible, meaning a broader range of negotiations.

The operating expenses associated with a building are negotiated, and the terms agreed on influence the base rent. The tenant also takes a proportional share of expenses like utilities. The landlord handles other costs associated with the property and ownership (maintenance, taxes, etc.).

Key Components of a Commercial Lease

Before leasing a commercial property, it is important to formally understand all the key components involved. These details help tenants and landlords understand what is expected from both parties and prevent misunderstandings concerning the lease. So here are some key components of a commercial lease:

• Rent
• Parties involved 
• The property uses
• Security deposit
• Property Insurance
• Utility fees
• Maintenance Fees
• Lease term for example the rent duration

Calculate the Cost for Different Lease Types

There's no one-size-fits-all method for determining the calculation of a commercial lease. Here is a general guideline for how each lease type is calculated.

Gross Lease

Commercial leases are often calculated based on square feet. The number of square feet is multiplied by the cost per square foot. The figure obtained is then multiplied by the lease period. 

The landlord then adds other additional costs like maintenance, insurance, and utilities. The combination of these expenses, including the rent, is then issued as the base rent to the tenant. 

Net Lease:

To get the net lease, the base rent is added to the other expenses required to be paid by the tenant. This could include property maintenance charges, insurance, or taxes, depending on the net lease type and the agreed-upon expenses.

With the square foot of space calculated, the landlord and tenant decided on the other building's financial obligations. These can be shared according to the space incurred or the number of tenants in a building. For example, a tenant leasing 400 square feet for $5,000 monthly may be responsible for one-third of the building expenses compared to a tenant leasing 600 square feet.

Modified Gross Lease

The landlord is responsible for some of the building expenses with the modified gross lease. So, for example, if the landlord is responsible for the real estate taxes, the tenant will be responsible for the building insurance and CAM.

 

So if the MG (modified gross) for a space is set at $10.00/SF(rent by square foot by year), you calculate the total size of the space multiplied by $10. Then divide the amount gotten by 12, and that's your monthly rate.

 

This amount is multiplied by the monthly estimate of the building's insurance and CAM fee. The amount gotten is the modified gross lease.

Understanding Rent Increases

The location of the property, the kind of lease you have, and the rental market are some of the variables that affect rent hikes. Therefore, you should be aware that when your lease expires, your rent will probably go up.

If there is rent control on the property, this might not be an issue. Rent increases may result from maintenance, taxes, and insurance premium increases. For example, adding additional amenities or renovating existing spaces may potentially raise prices.

Additional Cost Considerations

A commercial lease may also be impacted by an increase in living expenses. Both landlords and tenants are impacted by the increasing cost of living. 

Therefore, in order to keep costs under control, property owners undertake the necessary alterations. This could eventually lead to more leasing. 

Using Online Lease Calculators

Online lease calculators are handy when figuring out a commercial lease either for office or retail space. This calculator is flexible and can help determine the rent lease for a year. The online lease calculator takes into account all the factors involved in commercial leases and promotes easy estimations.

Conducting a Cost-Benefit Analysis

You can evaluate the soundness or feasibility of a commercial lease arrangement using a cost-benefit analysis. This method is crucial in making a well-informed decision. It helps prevent significant losses and determine net benefits. Therefore, conducting a cost-benefit analysis helps weigh the benefits and drawbacks before signing a commercial lease.

Conclusion

Commercial leasing agreements differ significantly. Therefore, before signing a commercial lease, be sure to read and understand all the terms involved. A broad summary of what to anticipate from each lease is discussed above to better prepare you for the lease market.

It is also crucial that you have experts, like a commercial real estate advisor, evaluate these contracts. Following these steps helps prevent poor commercial lease choices.