We all understand the practice of comparison shopping. When you’re shopping for groceries, for example, if two jars of the same peanut butter are priced differently by certain stores, the cheapest product is the one with the lowest price. But what’s simple when comparing groceries is not that simple when comparing real estate.
Landlords in most areas of the country quote rent in terms of the annual rent per rentable square foot, which we discussed in Chapter 1. To calculate the annual rent, simply multiply the annual rate per square foot by the rentable area.
Rate per square foot
X Rentable area
So if you know the rentable square feet and you know the annual rate per square foot, it’s easy to calculate the annual rent – right? Well, as usual, realty and reality are more complicated than that.
To compare rental rates, ask the landlord to spell out which services are “included” in the rent. A brief list of typical building services are:
- Electricity for lighting and office equipment (known as tenant electricity)
- Electricity for heating, ventilating and air conditioning (called HVAC for short)
- Maintenance of the common areas, roof and building systems
- Cleaning services
- Landscaping and exterior maintenance
- Snow removal
- Management of the property
- Building Security
- Elevator Service
A complete list of building services may be several pages long.
Under the terms of a gross lease, the full range of services, such as the list above, are included in the rent.
By contrast, tenants pay their proportionate share of the cost of building services separately to the landlord under a net lease. They also may contract directly with the utility company or service provider to obtain electricity, water and other utility services.
Let’s compare a gross rent quoted by a landlord at Building A asking $23.50 per square foot with a net rent at Building B asking $17.00 per square foot. How can we determine which is better? Let’s look at the following example:
Gross Lease Net Lease
Building A Building B
$23.50 Rent $17.00 Rent
0.00 Real Estate Taxes 1.50 Real Estate Taxes
0.00 Electric for Light 1.00 Electric for Light
0.00 Electric for HVAC .80 Electric for HVAC
0.00 Cleaning .80 Cleaning
0.00 Common Area Mainten. 2.40 Common Area Mainten.
$23.50 PSF Total Rent $23.50 PSF Total Rent
If we calculate that the cost of the net building services at Building B is $6.50 per square foot, then it appears that the rents for both Building A and Building B are exactly the same.
By determining the cost of services in Building B, offering a net rent, we can make an “apples-to-apples” comparison to the gross rent offered in Building A.
The words gross and net can be sources of confusion, but if you know how to ask the right questions, any confusion can be eliminated.
The gross lease is the most common type of lease used in multiple occupancy office buildings (buildings with more than one tenant), while the net lease is favored for the single user building. Industrial buildings and hi-tech buildings are typically structured as net leases as well.
Don’t get caught in the confusion of real estate jargon, especially such terms as net, double net, or triple net. If you understand the basic concept of net and gross and ask the landlord to state exactly what services are included or not included in the rent, you can easily compute the rent.
Some landlords may tell you that their rental rate is a gross rental, but when you question them further, you may find that some building services, such as nightly cleaning services, may not be included in that landlord’s idea of a gross lease.
Secret No. 9 — Ask the landlord exactly what services are included in the rent. Use a building services checklist to make sure you know which services are included.
In many regions of the country, rent is quoted as gross plus tenant electricity (defined as electricity costs for lighting and office equipment). In this case, the electricity is being charged separately as an addition to the rent quoted. Landlords may choose to charge separately for tenant electricity as some businesses have high-powered computer servers and equipment that operates after a building’s standard business hours; in some cases, 24 hours a day, seven days a week.
Hint! Don’t confuse tenant electric charges with electricity charges for HVAC (heating, ventilating and air conditioning), which may already be included in the gross rental calculation.
Operating costs will vary significantly from one region of the country to another and may even vary from one building to another in the same town.
In the next chapter, we will discuss operating expense and real estate tax escalation charges and how they affect rental costs over the term of a lease.
In California, just to be different, rent is usually quoted on a rent per square foot per month basis instead of per year as in the rest of the country. Landlords in California have figured out that when they round the rent to a nickel, or 5 cents per square foot per month, they are actually dealing in multiples of 60 cents per square foot per year.
Contrast that with the multiples of 50 cents per square foot increments typically used by landlords quoting an annual rental. Total all those extra nickels, and the additional rental dollars can really add up.
Categorised in: Rent