In commercial real estate, things like 'net rent', 'gross rent', 'face rent', 'effective rent' and 'gross effective rent' get thrown around a lot.
However, many tenants need help understanding the difference between these terms. And it's essential because you could be paying a vastly different amount than expected, depending on which is used.
Here's a quick breakdown.
Net rent
The net rent is the base amount of rent payable. Tenants may be required to pay additional expenses calledoutgoings(a.k.a building costs), such as:
- council rates
- land tax
- water rates
- building insurance
- strata levies
The landlord primarily benefits from this type of arrangement as, if the cost of outgoings increases, the tenant pays the increase.
Gross rent
The gross rent is a figure that includes the outgoings listed above.
For tenants, this type of arrangement can mean greater consistency because they'll know exactly how much the rent (and outgoings) will be each month without any costly surprises. It may also be more convenient because it involves asingle payment rather than multiple monthly charges.
However, these days, it's rare to see a gross lease that genuinely covers all outgoings. Many leases would be more appropriately labelled as 'semi-gross' and are structured in one of two ways:
- Increases over the base year– under this arrangement, the landlord pays an amount each year towards outgoings, and tenants split the cost of any outgoings increases based on their occupancy share of the premises. For example, let's say a tenant pays a gross annual rent of $100,000 in Year 1 and, in Year 2, outgoings in the office they occupy increase from $12,000 to $15,000 (increase of $3,000). Under a base year lease, this means that the tenant will have to pay a gross rent of $103,000 ($100,000 plus $3000 increases in outgoings) in year two. The calculations seem simple, but poorly negotiated base calculations can cost tenants thousands.Here's what to look out for.
- Tenants pay for certain outgoings- under this arrangement, the tenant agrees to pay for specific outgoings, for example, only water rates.
So, if your lease is a Gross Lease, it's essential to understand whether it is fully-gross or semi-gross and how the difference can affect your bottom line.
Face rent
Face rent is a rental figure that disregardsincentivessuch as rent-free periods, rent reductions (a.k.a rent abatements) and fit-out contributions. The term is used interchangeably with "asking rent." Whether this figure includes building expenses depends on whether the rent is quoted as "Gross" or "Net."
Effective rent
Effective rent is a rental figure that accounts for any rent-free periods and other incentives provided to you as the tenant. It's the amount you'll pay each month or year when averaged out over your lease term.
Effective rent is the number you want to use when comparing options. That's because it helps you compare properties with varying rents, incentives and outgoings to ensure you're getting a well-structured deal at a fair market price.
Gross Effective Rent
Gross Effective Rent is the rent payable under the lease, considering all incentives and including all building outgoings.
For a breakdown of more terms, check out ourfull glossary of termsor contact one of our team members.
About Tenant CS
Tenant CS is an entrepreneurial, independent tenant representation firm. Our mission is to help businesses save time and money and get deal terms that benefit them (not the landlord) through our deep-dive market analysis and lease negotiation strategies.
We cater to companies across Australia, Singapore and the greater Asia-Pacific region and have offices at the heart of the Sydney CBD, Melbourne and Singapore.
Book a calltoday to find out how we can help you with your nextlease negotiationorrelocationproject.
