CRE Math: Everything You Need to Know

CRE Math: Everything You Need to Know

CRE Math

If you plan to own a CRE property, you will need to do a great deal of math. CRE Math consists of many formulas. In this blog post, we go through the most commonly used formulas you will need to know.
 

If you have a business in Michigan like I do, your heating bills are much more money in the winter than a business that operates in Arizona. To calculate your heating and cooling costs, you first need to know how much per square foot the landlord is charging.

In Michigan, many office landlords will charge the same amount they have to pay how-ever, more often than not, there is a markup. I see the range anywhere between $1.00/s.f. to $1.50/s.f.

 

Assumptions:

Square Footage: 5,000

Cost to Tenant for Electric: $1.25/s.f.

5,000 s.f. x $1.25/s.f. (electric charge) = $6,250/year

$6,250/year / 12 months = $520.83/month

In an industrial or retail building you be responsible for maintaining the HVAC units. Here is how to calculate this cost:

 

Assumptions:

Square Footage:  15,000

Units to Maintain:  5 units

Annual Cost to HVAC company:  $500 each

5 units’ x 500 = $2,500 annually

Cost/s.f.:  $2,500/10,000 s.f. = 16.6 cents/s.f.

 

Electrical Bills

1.25 /s.f.
5000 s.f. leased
5000 x 1.25 = 60,000
60,000 / 12 months = 5,000/month

 

Parking Calculations:

Parking costs can get complicated. Depending on the location, you may have some parking spots that are more expensive than others. To keep this example simple, I’ve assumed everyone has the same rental rate per parking spot. Parking spaces are usually rented out monthly.

Number of Cars: 30
Monthly Parking Fee: $150/car
Leased Office Space Square Footage: 7,000

Calculation

10,000 sq ft x 1.85 = 18,500/year

18,500/year/12 months = $1,541.67/month

 

Annual Cost:

Start by calculating the number of spaces required for your business and multiply by the cost per car and then multiply this number by 12 months.

30 spots x $150/spot x 12 months = $54,000
$54,000 / 12 months =$4,500/month

 

Parking Cost/Square Foot:

Take the annual cost and divide it by the rentable square footage for the space.

54,000/7,000 s.f. =$7.71/s.f./year

 

Janitorial Math Space Footage Leased:

5,000 Cost/Square

Foot for Janitorial: $1.50 5,000 s.f. x $1.50/s.f. = 7,500/year

7,500 / 12 months = $625/month

 

 

Tenants Share of Taxes:

If you have a net/net/net lease, then your firm is responsible for the rent plus a share of the operating expenses, taxes, and insurance.

Tax Expense:  $1.85/sq ft

Lease Area:  10,000 sq ft

 

Calculation

10,000 sq ft x 1.85 = 18,500/year

18,500/year/12 months = $1,541.67/month

 

Tenant’s Pro-rata Share of Electric

Building Square Footage: 10,000 s.f.

Tenants Rentable Square Footage: 5,000 s.f.

Monthly Electric Bill: 1,500 Tenants Share of Electric bill 5,000 / 10,000= .50%

Monthly Electric Bill 1,500 x .50 = $750/month

Annual Cost for Electric 750 x 12 months = 9,000/year

 

Calculating Rent/month

5,000 s.f. x $20.00/s.f. = $100,000 / 12 months = $8,333 per month

 

Calculating Rent in California

$16.00 s.f./year/12 months = $1.33/month/square foot
$1.33/s.f./month x 5,000 s.f. = $6,650/month

 

Financial Summary for an Office Lease

This year we have been showing you how we calculate the various costs that go into preparing a financial summary. Curious what this looks like with all the costs together? Wonder no more as we have included a financial summary for you to review.

Looking at the top rows you can see the square footage leased, lease start date, lease expiration date, annual increases, free rent, the operating expenses in the initial year of the lease and tenant’s contribution to the improvements. The lower half breaks down the costs by year. As you can see the tenant is paying for increases over the base year of operating expenses, some parking expenses along with gas and electric.

It is important when you are working with an agent that they prepare a financial summary for every property under consideration. Then you can make counter decisions based upon fact not conjecture. For this tenant the total cost of the transaction over 127 months is $7,397,434. Doesn’t it make sense to have this type of information available to you when you are making a financial decision? If so, contact us for your next renewal or relocation and we will provide your team with the important information to decide.

Financial Summary for an Office Lease CRE Math

 

 

 

 

 

 

 

 

 

 

 

Financial Summary for an Industrial Property

Please note utilities are not included because the office to warehouse ratio is usually different in most buildings and the ceiling height of the space can also make a big difference in the costs. The operating expenses include common area maintenance, taxes and insurance.  If one wants construction the landlord isn’t willing to provide that costs should also appear in the first year cost.

This is a fairly simplistic model but it gives one idea on what a summary should look like.

 

Financial Summary Industrial 8.27.18

 

CRE Math Series: Holdover Fees

Rent/Month: $5,000

Holdover Penalty in Lease: 25%

5,000 x .25 = $1,250/penalty/month

$1,250/month / 30 days = $41.37/penalty/day

/ Commercial Real Estate

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