When you have a commercial property as an investment, leasing your space is a great way to get a return on your investment and have a positive impact on your portfolio. But how much should your tenants pay in rent through a commercial real estate lease?
Lease a Commercial Building: The Benefits
Investing in a commercial property is more complicated than investing in residential property, but it is well worth the extra education and investment. The great news is most commercial tenants are more business-oriented and experienced when it comes to a commercial real estate lease. Plus, they often hire a commercial real estate agent or attorney to handle their lease activities.
Commercial rental properties include:
- Shopping malls
- Professional offices
- Strip malls
- Free standing buildings for office and retail space
Getting a commercial rental tenant in an office or retail space can mean many years of dependable rental income and cash flow. This is especially true for commercial real estate property that is in a high traffic area where a tenant will be reluctant to leave because of the level of business. Tenants like this often pay for repairs and improvements, depending on their type of lease, and take care of the property well.
Things to Consider When You Want to Lease Commercial Property
A commercial real estate lease uses various pricing methods. The commercial property loan calculation that you use often depends on the nature of a tenant’s business. The economy can also play a part. You want to balance the occupant’s ability to pay with the need to retain an occupant. Retail revenue in particular can vary with the seasons or demand cycles. Some leases work well for varying incomes, allowing a tenant to make reduced lease payments during lower revenue periods.
Determining a Commercial Real Estate Lease Rate
The amount of rent you ask tenants for is generally based on square footage. However, you are probably wondering how you determine the cost per square foot. This is based on a number of factors, such as the property value and any payments you are responsible for as a landlord. Some of the factors that might dictate the cost per square foot include but are not limited to:
- Your mortgage rates for a commercial real estate property
- Your interest rates for a commercial real estate property
- Your insurance for a commercial real estate property
- The commercial property value estimate or worth
- The location of the property
- Building Class
- Extra amenities (such as concierge services or parking)
Loan Calculator for Commercial Property
Once you have determined the rate per square foot, you can calculate the amount of rent you should be asking your tenants for.
- Square Footage multiplied by Rent Per Square Foot = Total Rent Per Year
- Total Rent Per Year divided by 12 = Rent Per Month
This rate can either be based on Usable Square Footage (USF) or Rentable Square Footage (RSF). USF is simple to understand. It refers to the amount of square feet that a business uses or takes up in your building.
RSF also takes into account any space that a tenant might share with another business in the building, or common areas. Some examples of common areas include a lobby, a shared restroom, or corridors. In order to determine RSF, you must calculate the percentage of your building that is common space. So if you have 25% of RSF, you add on 25% to the tenants USF. In other words, if the tenant has 5,000 square feet, they will actually be responsible for paying for 6,250 square feet.
Working with a Commercial Real Estate Broker is Better!
Knowledge of the local commercial real estate lease rates and market can be extremely helpful. That is why working with a commercial real estate broker can be beneficial to your bottom line. They will be able to help you determine the rate per square foot as well as take into consideration other factors, such as the commercial real estate lease structure.
Looking for a Commercial Real Estate Agency Near You?
Are you ready to lease a commercial property? Or perhaps you are ready to look at commercial property as an investment. Whether you already have a sizable portfolio or are a first time commercial property buyer, JP Powell can help you! He has over 20 years of experience in Middle Tennessee’s commercial real estate market. With his local expertise and drive to exceed your expectations, he can help you assess the right commercial real estate lease for your needs. Contact him today to learn more.