In the world of commercial real estate, nothing is as it seems. At least not at first.

Take rental rates.

You may be comparing several places available for lease, with a $/SF quote, so you can compare apples to apples… but then there are those cryptic words:

“full service”, or “triple net”, or worse yet: “NNN”.

Someone please translate! Why is it so difficult?

It basically comes down to the building, the user type, and landlord preference.

Let me give you an example: Office buildings.

If you owned an office building, it would be easy enough to get a good estimate of what it would cost in electric, gas, water, etc. for 40-50 hours a week for a typical office tenant.

No matter which tenant. Office is office whether it’s a software company, an accountant, or an office for a construction company.

A typical office uses only so much in utilities in a given week. Other costs are fairly fixed as well.

It’s pretty easy to estimate those costs, therefore many office building landlords are comfortable paying all of those costs and quoting simple “full service” rate, which includes the landlord paying for utilities, real estate taxes and property insurance on the building.

However, this isn’t always the case.

Due to building nuances, landlord sophistication, or lack thereof, you may be asked to pay for your own share of utility costs, property insurance, real estate taxes or maintenance.

Another example:

An industrial tenant, with heavy electrical usage for equipment, welders, etc. or a dental office with plumbing in every room, would have an above average usage of electric or water directly related to their business.  Or their use may raise the property insurance costs.

Therefore, may find these types of spaces quoted with a base rate, and the tenant paying for their share of the utilities, real estate taxes and/or property insurance.

Which brings us to “triple net”, or NNN leases, and relates to the amount the landlord would receive in base rent “net” of the three costs to occupy space being Utilities, Real Estate Taxes and Property Insurance.

Or as stated at The Motley Fool:

A triple net lease (or "nnn" lease) is a form of real-estate lease agreement where the tenant or lessee is responsible for the ongoing expenses of the property, including real estate taxes, building insurance, and maintenance, in addition to paying the rent and utilities. (https://www.fool.com/knowledge-center/what-is-a-triple-net-lease.aspx)

For demonstration purposes, here is an example of 1 property quoted both ways:

This assumes you know, or the landlord can show, actual costs related to taxes, utilities and insurance on the premises.

From here it can, and usually does, get more complicated, but understanding who pays for these additional expenses and drilling down on how much they actually cost before you sign in the case of a NNN lease, is at the heart of the two different ways of quoting rates and will help you compare apples to apples on your next leased property.

I hope this helps, and there certainly is a lot more out there on the web if you want take a deep dive.

But if you’re already in the “more complicated” stage and prefer talking directly to someone about your particular situation, I’d be happy to help sort it out with you - just email me at [email protected]

-Darin Shriver

Darin Shriver is a Commercial Restate Consultant at Beynon and Co. who has saved clients tremendous amounts of time through his understanding of the commercial real estate markets and negotiating nuances in the South Hills of Pittsburgh and Washington County, PA.
 

1.      In many buildings, the economics of leasing this size of space make it difficult on several fronts. Generally speaking, it’s hard to stabilize a building with office suites under a certain size threshold, and rarely are new office buildings ever built with this size user in mind. (There are a few that have done so, and have done it well, but you pay a premium on a $/SF basis.)

Let's look at an example:

1500 SF X $16/SF = $24,000 per year gross income to Landlord. Pretty good for him/her/them  right?

Not really. If it’s a typical “full-service” lease in an office building, the landlord will pay for utilities, real estate taxes, building insurance, building management, landscaping, snow/ice removal, periodic upkeep on roof, parking, HVAC, not to mention debt service, which will reduce the net income on the building significantly.

The building can’t lose money, at least not for long. That’s common sense.

2.      Also common in this size range, are tenants seeking shorter terms, in the 1-3 year range.

This also limits how much money the Landlord is capable of investing in the space on upgrades or renovations significantly.

If a landlord offered a reasonable $15/SF build-out allowance to renovate your new office prior to moving in, it would look like this:

$15 x 1,500 SF = $22,500.

In this example, which is not uncommon, the space would still be losing money at the end of the year, and the owner still had to cover the utilities, taxes, insurance, upkeep and maintenance in the meantime.

What happens when the actual cost to renovate is $25/SF or $40/SF?

Tenants, on the other hand, are often unwilling, or unable to dump that kind of money into someone else’s property.
So as new buildings mature, owners resist chopping them up into smaller and smaller suites, yet like a pyramid, with the largest users at the top, there are many users in this range.

No wonder this size suite can be hard to find sitting empty and in “turnkey” condition.

So what can you do about it?

Here are 3 ways to improve your odds of securing your 0-2,500 SF space:

1. Take the space “as is” or as close as possible to “as is”. This will require finding that perfect space, already built to your needs. But it will allow you to short cut the tenant and landlord cash flow issues related to build out.
2. Prepare to offer a longer term.

Five years, 7 years, even 10 years, and be willing to back it up by providing financials on the company, or by signing a personal guarantee and providing personal financials.

With that type of transparency and commitment, you will instantly stand out among the typical tenant that calls on the space, and it may be just the trick to entice the building owner invest in building out for you.

3. Offer to pay for the build out yourself, up front, either to the landlord or directly to the contractor.

This also removes some of the financial risk from the landlord and shows a high level of commitment from the Tenant.

Again, if you can show that you have the resources to cover your own renovations, you will immediately move to the front of the line in the Landlord’s mind and you’ll be in a good position to negotiate on the rate.
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In my experience, as a both a Tenant Representative Agent and a Landlord Agent, these are the challenges both parties face in this size range and these are just some of the ways I’ve seen them come to a resolution.
Now, I know what you’re thinking: “If that’s the case, then I’ll just buy a building!!!!”
More on that next time….
-Darin
Darin Shriver is a Commercial Restate Consultant at Beynon and Co. who has saved clients tremendous amounts of time through his understanding of the commercial real estate markets and negotiating nuances in the South Hills of Pittsburgh and Washington County, PA.