SUBJECT AREA - LEASING VARIABLES
Tenant Rent Formulas
- Every “use” has an occupancy percentage that they can afford.
- Every “use” has an ideal square footage that they should target to lease.
- When leasing commercial property, YOU SHOULD always base your maximum occupancy budget on your best analysis of a sales projection for your business or “use”. Formulate a sales projection and then adjust it up or down based on the strength of the location, demographic profile of the customers in the trade area and the quantity of the competition you have identified.
For example: Let’s assume you want to open a 2,000 sq ft restaurant. Let’s assume your restaurant can dedicate 8% of sales to base rent, CAM, Taxes and Insurance which are your pro-rata charges. Let’s assume you found a space and the agreed upon base rent was $40.00 psf and your NNN charges where $10.00 psf. $40.00 plus $10.00 = $50.00 x 2,000 feet = $100,000 annual occupancy in year one divided by 8% = $1,250,000 in year one sales will be needed to maintain an 8% occupancy ratio. This is not a sales projection tool. It is an occupancy tool. If you only project $1,000,000 in sales then you can only afford 8% of a million or $80,000 in occupancy divided by 2000 feet = $40 psf and since prorata are $10 psf then for that space you can only pay $30 psf base rent. If you can’t negotiate the base rent to $30 psf you can’t afford that specific space.