Although it varies even within the state of Florida, here in Tampa we market as a gross rent, meaning that we, as the landlord are responsible for all of the operating expenses. The gross rent of $30 per square foot that we charge and Wells Fargo Center includes everything (i.e. it includes electricity, water, cleaning, real estate taxes etc). The only thing that we normally do not include in the rent in a downtown Tampa office building would be the cost of parking, which can vary from tenant to tenant.Now the opposite of a gross rent is a net rent. In the case of a net rent, the tenant pays all of the operating expenses over and above the rent to the landlord. For example, let’s assume Wells Fargo Center has roughly $11 of operating expenses. Assuming the gross rent would be $30 per square foot, we could quote it as $19 per square foot net. In this example, the tenant would pay approximately $11 per square foot of operating expenses and would be responsible for 100% of any increases in such expenses. Some markets, like downtown West Palm Beach, certain places in Sarasota, and other areas of the state, do quote rents on a net basis. It’s very important to understand whether a rent quote is monthly or is it annual, and whether it is net or gross. These basics of rent comparison will help you make a more informed decision about whether or not a property is worth its value. Properties marketed as a net rent may have more costs later on that you’re not immediately aware of.
The lender will also review how strong the credit is behind the leases and the length of the lease terms in place. The most challenging situation for a lender would be if the building in question is fully leased to a tenant that is in financial trouble, with only one or two years left on their lease. That’s the antithesis of, let’s say, having Google lease your entire building for 20 years.Those are the two extremes on opposite ends of the spectrum. In these two examples, the amount of loan proceeds that a lender will provide and the interest rate at which it will lend will vary significantly. For example, in the case of the week financial tenant with only one or two years remaining on its lease, the lender may only be willing to lend 50 to 60% of the value of the building and the interest rate may be as much as 2% higher. In contrast, in the Google example, the loan proceeds might be as high as 80% of the value of the building in the interest rate might be 2% lower. Factors Affecting Commercial Rent Rates Let’s examine some of the factors that determine how much that annual or monthly lease is going to be. Several variables can affect commercial rent rates. Competition is a big one. Even if your building is well-appointed, if a brand-new building goes in next door, that’s what people will be talking about. Vacancy rates are also an issue. If there are high vacancy rates, that’s going to put downward pressure on rental rates. When a landlord calculates how much they can ask for a space and what drives that, they are faced with a mix of variables. In terms of the rents that a landlord quotes, in a utopian landlord world, we would be able to quote a very high rent which would give us a very healthy return based on our investment. Indeed, that may be something we’d be able to do depending upon the market conditions, but the first and foremost dictate of what rental rates will be are current market conditions and competition. First Central Tower / St. Petersburg, FL For instance, in downtown St. Petersburg in 2010, the vacancy factor ran up to about a 30 percent. Overall, the market was horrendous in the office building business. When you get up to a market-wide vacancy of 30 percent, you’re in a tenant’s market to the “nth” degree. Rolling the videotape forward into 2020, we are now experiencing vacancy levels in downtown St. Petersburg at around 6 percent. Rental rates went from about $20 per square foot when I first invested there in 2009 to the mid –$30s per square foot right now. Over the last 10 years, we’ve seen over a 65 percent appreciation in rents because of the declining vacancies and the lack of new supply.
In theory, we could even charge more. We could even go to $40 a foot and we could probably get it. I’m always thinking about the next recession, and that’s just unique to how we operate at Feldman Equities. ‘Rent and repent’ is an old expression my dad used to use, and it’s what we all live by here.In other words, our policy is first and foremost to keep our buildings full. Our strategy is to undercut our competition with lower rental rates in order to drive occupancy up and to provide an incentive to tenants to give us longer lease terms. Longer lease terms help us obtain better financing and they let me sleep at night. We are constrained by market conditions and sometimes we can get a little more rent if we hold out a little bit longer, but we are inclined to fill up our buildings as quickly as we can. We are perfectly happy to concede with modestly lower rents in order to get long lease terms from creditworthy tenants. Measurement of Square Footage in office space In the office building business, square footage is quoted as “Rentable square footage”. It’s important for tenants and brokers to understand how “rentable” square footage is computed. In order to understand the computation of rentable square footage, its first important to understand the definition of Usable square footage. Usable Square Footage Wells Fargo Center / Tampa, FL Usable square footage is defined as the total area available exclusively to the tenant; the space within a building specifically for a company or tenant’s use. Usable square footage refers to the square footage that is inside the tenant suite and specifically excludes circulation corridors, bathrooms, stairwells etc. The usable area is sometimes loosely referred to as “carpetable area”. When calculating Usable square footage for a partial floor, you must specifically exclude the floor area in front of the elevators (the elevator landing area), as well as restrooms, electrical closets, mechanical rooms, etc. Rentable Square Footage The Rentable square footage for an office building includes the Usable square feet combined with the tenant’s pro rata share part of the common areas of the building. The concept of Rentable square footage is that the landlord has paid for the construction of not just the Usable area, but is also providing circulation corridors, bathrooms, elevator landings, stairwells, lobbies, electrical and mechanical closets, etc. The percentage relationship of Usable area versus Rentable area in a typical office building in downtown Tampa is approximately 20%. The generally accepted market practice in downtown Tampa is to first compute the Usable area using a very specific definition that excludes all common area. A factor of 20% is then typically added onto the usable computation to arrive at the Rentable footage. For example, if the Usable square footage of a tenant’s space is 1,000 ft.², then in downtown Tampa, the Rentable area would typically be 1,200 ft.²
Industry professionals use rentable square feet to determine the amount of your annual base rent expense. In order to accomplish this, multiply the rentable square feet with the annual base rental rate for the lease.Lease Quotes How long the lease term is and the amount of the tenant improvement cost all weigh into how much rent you’re going to quote to the particular tenant. If a tenant says, “Hey, I’m going to come into your space, take it as it is, and you don’t have to do anything, and I’m going to sign a lease and move in tomorrow morning, meaning there’s no downtime and no construction”, we might be willing to rent that space for less than our normally quoted rent of $30 per square foot. Those are the kind of factors that weigh into how rents are quoted. Comp Prices Wells Fargo Center / Tampa, FL When calculating a rent that we would quote a tenant, the most important guide is – What is the marketplace allowing us to quote? Is the competition for an equivalent building at a rental level that is competitive. For example, in downtown Tampa for our Wells Fargo building, we’re quoting right now about $30 per square foot, as I said. If there were an equivalent quality building quoting $25 right across the street, it would be very difficult for me to quote $30. Related: What is the difference between Class A, B, and C properties?
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Investors looking to diversify their portfolio often consider investing in commercial real estate. Some will start by buying small multifamily properties, two or four units at a time. When the time comes to buy more substantial commercial real estate properties, such as an office building, most investors aren’t sure where to begin.
When my wife had our first child, it was a difficult pregnancy and my wife swore that we would never have another child. With the joy that our first child brought us, my wife had a change of heart and we decided to have another baby.