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COMMERCIAL RENTAL TERMINOLOGY:

“Dollars Per Square”? What does it Mean?

Commercial rental suites, typically rent of a Dollars Per Square Foot Per Annum Basis (meaning dollars per square foot a year). This is abbreviated frequently as $/PSF, PSF or psf.  In all cases, the $ PSF quoted is multiplied times the size of the rental space resulting in an ANNUAL rent. Dividing by 12 will give you the monthly rent. The Formula is $/PSF X Area = Annual Rent in Dollars. In St. Louis and the majority of Missouri and Illinois (outside Chicago) PSF per annum is the coin of the realm.

 

Exceptions to Note: Apartments are sometime rented in Dollars PSF per month.  Normally the rental agent quotes apartment rents in a “monthly rent” leaving the math out of the quote. In other large cities around the country, but not usually in our part of the Middle West, Mid South, Texas, and the Southeast and Southwest, rental agents may quote space in Dollars Per Square Foot Per Month (this is most common in Chicago, California and the Urban East Coast Cities like New York and Washington, DC.

“NNN” “MG” “Full Service” Mod Gross” “Net lease ”and “Gross”? What does it all Mean?

Commercial rental suites, typically are quoted on a “net” rent OR “Gross Rent” OR “Modified Gross” rental basis which refers to one of three general rental concepts (which have variations and other names).  The three basis concepts are:

 

“NNN”, Triple Net, or Net Lease? What does it all Mean?

This means the tenant pays most costs of occupancy, ON TOP OF or IN ADDITION TO the base rent which is quoted on a  $/PSF basis (on monthly or annual basis. The concept is that the Tenant will pay most of the costs of occupancy (most typical ALL the costs, and the variation is usually on based upon who pays for the maintenance and replacements of te building, structure and site improvements. A typical NNN lease still leaves the Landlord maintaining the exterior of the structure, but usually not much else.  If the Landlord maintains exterior areas or parking lots, shared utilities or management and merchants’ association fees, these are usually billed back to the tenant (monthly, annually or quarterly) as CAM Charges, which stands for Common Area Maintenance. These types of leases are most common in retail rental spaces, shopping centers, freestanding buildings of any kind (especially where there is only one tenant), and more recently large industrial buildings and spaces.  Variations on this theme are NN, NNN, NNNN and Absolute Net Lease, or Ground Leases. The more “N”s, the more things the Tenant is responsible for; with a NNNN, Absolute Net, or NET Lease, typically meaning the Tenant pays even for maintaining and replacing the structure. Absolute Net Lease (sometimes shorted to “Net Lease” usually means that the Landlord has no responsibility. Most Ground Leases are Absolute Net Leases, where the tenants maintain the structure and everything else, and may even be required to demolish the building at the end of the lease.  Unless you are in retail, if you are a smaller tenant, you probably won’t be involved in “net leases”, so what kinds of leases are most common for such smaller tenants or non-retail tenants?

 

“Gross Lease” or “Modified Gross Lease”? What does it all Mean?

This means the tenant pays base rent usually inclusive of the Landlord’s real estate taxes and the Landlord’s property casualty and liability insurance, and maybe CAM, but usually all other cost of Occupancy. The Abbreviation is MG or G or Gross, but they only vary by what is included INSIDE the base rent that is quoted. “Gross Lease” is reality a misnomer in the St. Louis and Missouri Region, as in many other regions or cities it often refers to a “Full Service or Full Service Gross Lease” (the next kind of lese to be described), but in St. Louis Regional jargon it is often used interchangeably with the word, “Modified Gross”. This implies that some things are included, but most typically, the Landlord’s real estate taxes and the Landlord’s property casualty and liability insurance. Like a “NNN” lease, CAM fees typically are added on top of the base rent, but are sometimes included in whole, or in part.  This is the most typical kind of industrial lease, especially for smaller to medium size industrial spaces. Some offices are rented this way, when there are separate utility meters. In most cases, under a Modified Gross Lease, the tenants will pay for his own utilities, communications, inside cleaning a and maintenance, janitorial service and some allowance towards the HVAC or mechanical system maintenance, but that varies from lease to lease and building to building. CAM charges on a MG lease range from as little as $0.25 PSF per annum up to as much as $2.00 PSF on MG lease, and utilities range from about $0.50 PSF per annum to $3.00 PSF per annum. Professional janitorial cleaning of offices ranges from about $0.50 PSF per annum to $2.50 PSF per annum.  Annual increases in taxes and insurance are typically “passed through” to the Tenant, as “Additional Rent” above a Base Year Allowance amount OR on an annual gross amount called an “Expense Stop”.  Again, this is the most common small and medium size industrial or warehouse, office/warehouse, flex or service center rent.  In recent years, industrial rents are moving toward NNN leases, especially on larger rental suites and whole industrial buildings. Apartment rentals and mini-storage suites are usually rented MG or FSG, but are rarely expressed in such a manner, except by real estate professionals and investors.

 

“Full Service” or “Full Service Gross Lease” ? What does it all Mean?

Abbreviated as “FS, FSG, FSRG” this means the tenant pays base rent usually inclusive of all of the operating expenses and utilities and usually cleaning services, also including the Landlord’s real estate taxes and the Landlord’s property casualty and liability insurance, and CAM. The Tenant pays one monthly or annual rent, which is often adjusted at the end of each year, but only if the Operating Expense Costs increase. The limitation (if any) on Operating Expenses Costs are typically “passed through” to the Tenant, as “Additional Rent” above a Base Year Allowance amount OR on an annual gross amount called an “Expense Stop”.  This is the most common rent for office buildings and office suites. The concept is a stated monthly rent that only increases if Operating Expense Costs increase, or if there is a Step Rent or Graduated Lease (see below).

 

Graduated Lease or Step Rent:

This is a type of lease (it can be any type, NNN, MG or FSG) where there are annual or regular (even monthly) rental increases through the initial term, or option renewal years. Annual increases are most typical.  Sometimes a formula is used to calculate the “Step Rent”, like CPI Factor, or annual rent increase percentage. The concept is that the rent increases over time. This type of lease is best for tenants needing space now, but expecting income to increase greatly, allowing them to “fly now and pay later”. Or budget for higher rent in future years, allowing them to expand at a lower rent cost initially. The benefit to the Landlord is the lease renewal figure is usually based on the later years, so his rent grows with time making his building more valuable, hedging against inflation and future risk or cost increases. Structured properly, it can be beneficial to both the Tenant and the Landlord. Some prime retail space leases (like in a popular mall) have Additional Rent Clauses with result in a Graduated Lease, through different Additional Rent Formulas, like a “percentage of the retailer’s gross sales” over a base rent amount. These are frequently called “Percentage Rent Leases”, and are usually only seen on “NNN” leases or “Net Leases” of valuable retail sites, or in retail lease situations.  Percentage Rent Leases are utilized because the unique rental space location and surroundings, which may be central to the Tenants business success. In industrial and office building leases, the particular location is usually not so crucial to a business’s success, so long as it meets certain basic criteria, so percentage rents are seen in industrial or office building leases.

  

Save Money, Hire a Pro, for Free:

Leases can be complicated to negotiate, and most Landlords have their own “lease contract”, typically written to their benefit, so it is very beneficial to engage a commercial real estate professional, a real estate broker like Jeff Johnson or Jennifer Johnson to assist you in negotiating your lease. Especially, since in most cases THIS SERVICE is completely “FREE” as we are typically paid by the Landlord, who has already included these marketing costs in his base lease figures.   

 

Rental Space Math Review & Example:

Summarizing the concepts, we show you an example. A Friendly Business (we will call them AFB) is renting an office/warehouse suite with 1,000 SF of front offices and 2,000 SF of rear warehouse space, with a truck dock at the rear of the building. The Landlord’s Real Estate Rental Agent is quoting a rental rate of $8.00 PSF per annum, MOD GROSS. There will be step rent of 10% of the base rent in the last two years of a five year lease. The CAM is added on each yaer at $0.50 PSF per annum, and collected in advance monthly. What is the monthly rent?

 

3,000 SF x $8.00 PSF = $24,000 a year divided by 12 for $2,000 a month. CAM Fees add $0.50 PSF a year (3,000 x $0.50 for $1,500 annually), but is collected monthly, so divided by 12 and add to base monthly rent. See Below:

 

So Year One through Three: $2,125 a month Base Rent, plus Utilities & Inside Cleaning

In Years Four and Five: $2,000 x 1.10 = $2,200 plus $125 Cam for $2,325 a month Base Rent, plus Utilities & Inside Cleaning

      

Call us today or anytime at (314) 422-3695 for a free market rental rate discussion, analysis and estimate, or to utilize our exclusive Rent Versus Buy  Analysis Spreadsheet (in Excel).

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