Landlord positions on lease rates
During a lease negotiation for anoffice spaceor warehouse space, there are obviously 2 positions that are relevant, the landlord and the tenant’s position. We are going to briefly cover the landlord’s position on lease rates in this article. For a longer term lease the landlord’s position would require an escalation in place that happens every year, typically in the Austin market they can run 50 cents to 75 cents on office space and 3% per yr on warehouse space. So, why the escalations in lease rates? The increases in your lease cover the landlord’s increase costs and inflation.
Lease rate example
As an example if inflation returned to 13% , on a $1000 monthly lease rate the it would be worth only $540, also as an example if the landlord has an ARM loan on the property it is imperative on their part to have an increase in lease rates per year. When landlord’s increase the lease rates they can be tied to the CPI index, not as common in Austin or they can apply the fixed increased lease rate on the lease which is more common in Austin. In addition to the increases on the lease rates, the lease will be tied to a percentage increase of expenses (NNN) per year. The increases to CAM (common area maint), taxes and insurance should be set up to be in direct alignment with the tenant’s % of space they occupy against the total SF of the property in which they are leasing.
In some commercial real estate leases the landlord will charge a % rent of the tenant’s gross sales in addition to the fixed increases on the base rent. This is more typical in commercial retail type space. The percentage rent allows the tenant to pay less during slow periods and more during busy periods to the landlord. The downside to this is that it is not an easy proposition for the landlord to monitor what the tenant is actually bringing in and how it will be computed.