What is the Rent?
Have you ever spoken with a broker and heard some terminology flying around that didn’t make a whole lot of sense? The different words around the topic of rent can be confusing and can have very real impacts on the cost of doing business. Better pay attention!
In the “Development Jargon” series I hope to demystify the language of development. If you have suggestions for future demystifications, let me know on twitter!
Today I am going to explain the two main rent structures in simple terms.
In addition, you will get some exercises at the end of the article that will allow you to test out your new found understanding and approach your next rent discussion with more confidence!
In commercial real estate there are two main types of rent structure: gross rent and net rent.
Gross rent — also called full service rent — means that all costs associated with a space are paid in one rent payment. Gross rent figures are quoted on a per square foot per year basis. You might see a gross rent of $25/sf. For every square foot of rentable space the tenant occupies they will pay $25 per year. For a 1,000sf space the annual rent is $25,000 dollars.
- Quoted in dollars per square foot per year
- Also called “Full Service”
- All rent costs included in a single payment
Net rent means that the quoted base rental rate figure excludes certain costs that the tenant will be required to pay in addition to the base rent. The quoted rent is “net” of those other costs.
The most common net rent structure is NNN rent aka triple-net rent or net net net rent. NNN rent means that in addition to the base rent, the tenant has to pay the additional costs of Taxes, Insurance, and Common Area Maintenance. Taxes, Insurance, and Common Area Maintenance when combined are called TICAM. In a NNN rent structure, tenants also typically have to pay their own utilities.
If a NNN Rent is $8 per sf per year and the TICAM is $4 per sf per year the annual rent for a 1,000sf space would be $12,000 or $1,000 per month plus any additional costs the tenant has to pay directly.
- Also called “NNN Rent”
- Also quoted in dollars per square foot per year
- DOES NOT include TICAM
Why the difference?
The two rent structures are typically driven by landlord and tenant preferences and operational reasons.
Tenants may like a full service rent because they only have to track one number and make one payment. Everything related to the space is taken care of by the landlord, hence, full service.
Landlords may prefer a full service rent structure because they can have full control on the quality of maintenance, operations, and programing of the space. They can ensure the highest quality for their tenants and drive value by maximizing the efficiency with which they re-invest the rent proceeds.
Landlords or tenants may prefer a NNN rent structure when there is a large difference in the service level expectations of the tenants and the utility uses of the tenants.
I hope you enjoy this explanation of rent structure. Please take some time to try the exercises below. If you have any questions about the exercises or anything I discuss above, just reach out! My email is firstname.lastname@example.org
- Which rent is a lower monthly payment per square foot to a tenant with a NNN rent with $15 base rent and TICAM of $5 or a full service rent with base rent of $19 and taxes of $2/sf?
- What is the monthly rent payment on a 3,500sf space with NNN rent of $18 and TICAM of $6?
- How much would a TICAM charge have to be to make a $14 NNN rent more expensive than a $20 full service rent?
If you have suggestions for future demystifications, let me know on Twitter!
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