As Captain Kirk proclaimed, “Space, the final frontier!” Today my mission is to explore a different kind of space – the one people use to make, store and ship things.
In commercial real estate, regardless of type, industrial, office or retail space is measured by the square foot. Simply put, if a building’s floor plan is 100 feet long by 100 feet wide, the square footage is the product – 10,000 square feet. This measurement is then used to calculate rents, sales prices and operating expense percentages.
Rental amounts: In California, our rental or lease rates are quoted in monthly terms, for example, $1 per square foot. Locations outside of California can annualize rates at $12 per square foot. So, using our 10,000 square foot building and the rental rate of $1 per square foot, the monthly rental amount shown is $10,000 per month. Easy.
Sale price: The selling price of a package takes into account one of two measures. First, if a $10,000 per month lease is in place and a landlord decides to sell, the annualized rent is a return to an investor, say 4%. Therefore, $10,000 over the year equals $120,000. This $120,000 divided by our return of 4% results in a prize of $3 million. Per square foot: $300 ($3 million for a 10,000 square foot building).
If our example is vacant and our potential buyer wants a business address, the resulting value will be the comparable market per square foot multiplied by the square footage. Lately, we haven’t seen a big gap between what an investor will pay and an occupier. The “occupier premium,” a scenario in which someone housing a business would pay more, is a galaxy away.
Operating costs : Leases have an additional element worth mentioning: the manner in which operating expenses are reimbursed. You see, in addition to rent, other costs abound such as property taxes, building insurance, roof maintenance, parking lot sweeping, elevator repairs, lawn mowing and cleaning. tree pruning.
If you are on a gross lease, these expenses are included in the monthly check you write. With a net lease, you pay as you go. As you can understand, whatever the form, the expenses are up to you. Square footage is based on the percentage of space you occupy.
Say your 10,000 square foot house is self-contained. Yes, all of those operating expenses are yours. Conversely, if the 10,000 square foot space is a suite on the 10th floor of a 100,000 square foot office tower, your share would be 10%.
Uses of space: Typically, occupants – whether tenants or owners – place people, machines or products in their space.
When you visit your CPA this spring to assess your reimbursement amount, you will visit an office. Within the limits, there are people. A trip to your local mechanic’s shop will highlight the lifts, tire rotation equipment and diagnostic machines behind reception. Products abound in a T-Mobile store.
But wait, don’t all these different types of commercial spaces have people, you might be wondering? Sure. But how operations employ people makes a difference – calculating your marginal tax rate, changing your oil, or convincing you to upgrade to an iPhone 13.
Next week, I’ll cover the severe shortage of industrial space and some suggestions on creating new spaces. So stay tuned. Kirk, out!