Navigating Commercial Lease Comparisons: A Comprehensive Guide: Not all Lease Rates are Created Equal – Part 2: A Methodology for Accurate Lease Comparisons

Comprehensive Cost Analysis
Start by identifying all the costs associated with each lease type, including base rent, property taxes, insurance, maintenance, and any additional expenses specified. Don’t forget to account for the load factor, which can significantly impact the effective cost per square foot.

Effective Rate Calculation
To compare leases effectively, convert all costs into a common metric, such as cost per square foot per year, and adjust for the load factor and included expenses. This calculation provides a more accurate picture of the lease’s total cost.

Let’s look at an illustration of such a comparison:

We’re comparing two commercial properties based on their size, lease type, effective lease rate, and total annual cost, assuming the potential tenant is considering both for their business needs.

• Property A is a single tenant unit with 10,000 square feet of space, offered at a NNN lease rate of $35 per square foot, plus $7 per square foot in pass-through expenses.

• Property B offers 12,000 square feet, but with a 20% add-on factor, at a lease rate of $32 per square foot on a Modified Gross basis, with real estate taxes at $3 per square foot.

Key Takeaways

• Effective Lease Rate: Despite the initial appearance of a lower lease rate for Property B, when adjusted for the add-on factor and additional costs, both properties have an effective lease rate of $42 per square foot.

• Total Annual Cost: Both options result in the same annual cost of $420,000 when considering their respective sizes and all associated costs.

• Space Efficiency: Property A provides direct usable space without any add-on factor, making it more straightforward in terms of the area you’re paying for. Property B’s nominal size is larger, but effectively, the tenant pays for additional space that increases the rentable area to 12,000 square feet, aligning the usable space with Property A when adjusted.

This simplified comparison should help in making a more informed decision by focusing on the cost and space efficiency of each option.

We invite you to share your experiences, questions, or insights on commercial lease comparisons in the comments below. Whether you’re navigating these decisions currently or have wisdom to share from past experiences, your input can help create a richer understanding for all.