I talk daily with people interested in leasing property and have discovered that the way brokers price property for lease is not very helpful to the public. The small business owner, or start-up company, just wants to know what the rent is for a particular suite, but we in the industry price it by the foot per year on a triple net basis. Now, unless you have done this before, what I just said may sound a little familiar, but is not really very helpful.
So, let’s get some common language. And, understand that we’re not totally deranged, nor are we out of touch with the public. There are really good reasons to quote leasing prices the way we do, you just need a yellow pad and a calculator to answer the original question of “How much is that space for lease?”
Commercial leases can be gross, net, triple net, absolute triple net or full service leases, or combinations of these types. Let’s look at them and define some terms. There are several costs associated with leasing commercial property. There is the amount of money the owner wants to lease the space. There is the amount of real estate taxes applicable to the building, or suite within a building. There is also the premium amount of building insurance for the building. These are the leasing costs and the last three are collectively called net charges, or triple (because there are three of them) nets, or pass through fees, or simply CAMS. There are also operational costs that can come into play such as janitorial expense or utility costs. They all mean different things and all are important information for the prospective lessee to have.
Let me just line these terms out so we can look at them:
Let me just line these terms out so we can look at them:
Triple net lease:……………………………………….. The lessee (you) pays an amount per month to the building owner, and in addition to that, pays a pro-rata share of the building taxes, the building insurance and a pro-rata share of the common area maintenance, or CAM. This is quoted as a price per foot per year not including the additional prorated costs. We do this to make it easy to compare one space to another in terms of the net rent cost.
Absolute triple net lease:…………………………… The lessee pays all of the costs of a triple net lease, but also pays for the cost of maintaining the building including roof, structure, heating and cooling plants and other features of the building. This is typically used with a long term single tenant building and is the closest thing to owning a building and still be leasing!
Gross Lease:……………………………………………. The lessee pays a monthly amount to the building owner including the building taxes, insurance and CAM in one payment. This may be quoted as a monthly rate (helpful), or as an annual price per foot (accurate, but not helpful). This one is the most like the type of rent quoted for an apartment, or rental house.
Full service lease:……………………………………… This one is also a hybrid type of lease. The Lessee pays one fee and it includes all the items in a gross lease, but also includes much of the cost of operating your business such as utilities and janitorial costs. This would be used when it is impractical to separate the associated costs of owning and operating a commercial suite such as an executive suite complex, or if you are renting a single office in the back of a larger company, like a law office or something like that.
The next logical question is what does all this stuff cost? Our answer, in keeping with our tradition, is not too helpful. We say “that all depends on where you are and what building you are referring to.” But, let me go way out on a limb and make an attempt at actually being helpful. You will understand that as soon as I quote some prices, or facts and figures, they will be wrong in some situation!
Here goes. In the Iowa City – Coralville area, Net rent ranges from $12.00 to $14.00 per foot per year for new, first generation space on a busy street. If you are near the Coral Ridge Mall, or other attractive feature, it can go as high as double these rates. Real Estate taxes run about $3.00 to $5.00 per foot per year, building insurance runs around $0.25 to $0.50 per foot per year, and CAM, or common area maintenance runs from $0.75 to $1.50 per foot per year depending on how much it snowed. There can also be “mall charges” if you’re in a shopping center, but let’s leave that for later. The operations type costs can run around $1.00 per foot per year for janitorial expense and $1.50 to $2.50 per foot per year for utilities. These utility numbers went out the window when gas was north of $4.00 per foot, but have come back since oil prices have moderated.
So much for the monthly pricing part of a lease. There’s more. There are base terms, renewal terms, CPI increases, expense stops, non-compete covenants, signage issues, interior improvements, first generation, second generation space, class A, B, C and D space, early termination clauses, guarantees, net leasable, net usable, load factors, and yes, there can be more. These terms are more about the crafting of the lease over time and not about pricing, so let’s leave them for later.
What does this mean? It means commercial leasing is not a mystery and should be put to the test of comparison. When you make the call to find out how much, expect us to tell you in great detail, how much the space costs. Take notes and don’t get frustrated or feel overwhelmed. When you have the information you can not only determine how much the payment would be for a particular office or commercial suite, you are also armed to compare this suite with others on the market so you know what kind of deal you are getting. You will also sound savvy when you talk to your banker if you rip off some real estate leasing terms.
I hope this essay clarifies the issue somewhat instead of spreading confusion. I think being specific and accurate makes us all better and actually will help your business to succeed!