Many professionals forget that their clients don’t know the lingo of their business as well as they do. Brokers are no exception to this rule; we create a property survey, click “send” and assume our client will have no problems reading and understanding exactly what the survey says. The resulting confusion can waste time and create frustration for brokers and clients alike.
In my experience, the following four terms are the most likely to prompt calls for clarity on commercial property surveys. I hope this post will make things a little easier for everyone.
In a previous post, we discussed gross rent vs net rents. “MG” refers to a modified gross rent, which is basically the same as a gross rent except it might include other expenses such as tenant electricity or utilities. It’s important to understand the difference when deciding whether or not a particular building is within your budget. For instance, you might see a rate that is $25/square foot gross plus tenant electric ($1.75/square foot) and you might see one that is $26.75/square foot modified gross. These are the same. If you didn’t know that when reading it, you might dismiss the $26.75/square foot as a more expensive option.
“NNN” is short for “triple-net” and it is a term that indicates the client is responsible for net operating expenses (insurance and maintenance) and net property tax. Take the same $25/square foot from above as an example; that rent can be made up of a base rent of $15/square foot and NNN of $10/square foot, which gives you $25/square foot. The main difference between “gross” and “NNN” is that gross rents already include the NNN expenses. You don’t have to factor them in again.
Don’t be fooled here into thinking that a NNN property is less expensive that a gross property. If you have a rent that’s $25/square foot gross and a rent that’s $18/square foot NNN, you might think the $18/NNN is less expensive. Do you know how much the operating expenses are? If they are $9/square foot, then your total gross rent is $27/square foot ($18 + $9) which makes the $18/NNN option more expensive than the $25/square foot gross. I see this mistake all too often.
You know the expression “beauty is in the eye of the beholder?” Well, that goes for real estate too. What a landlord might consider a Class A building could very well be a Class B building when compared to other Class A buildings in the market. Clients can get caught up in the class of their prospective building. They might exclude buildings from their search because they think that a Class B building couldn’t be as nice or nicer than a Class A building. In fact, that’s not really accurate.
Building classes are determined by age, location, amenities and materials. I can show you a Class A building that has the right location and amenity package and compare it to a Class B building that isn’t in the best section of the market but has the same amenity package and same building materials… but isn’t deemed to be Class A because of a small difference in location. It’s worth looking at a variety of spaces, because Class A space is always more expensive than Class B. You never know what you might find. A Class B building could happily surprise you!
4 per 1,000 Parking
Parking ratios are very important to understand. A “4 per 1,000” parking ratio simply means that for every 1,000 rentable square feet (RSF) you lease, you’ll be allotted four parking spaces. So using this ratio, 5,000 RSF gets you 20 parking spaces.
Not every property has the same parking ratio, and it is easy to start eliminating properties from your list if you set a standard parking ratio before looking at space. In other words, if you’ve already met with a space planner and figured out that you need at a minimum of 5,000 SF and you have a total of 20 employees who drive to work, don’t look at any buildings that have less than a 4 per 1,000 RSF parking ratio.
All in all, a property listing is pretty straightforward. There might be phrases and numbers that don’t make much sense to you, but that’s ok! Don’t cross a property off your list because you don’t understand a term; call your advisor and have them explain it to you. It’s better to spend a few extra minutes educating yourself than to miss out on a potentially perfect opportunity.
The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report.
Based in Princeton, N.J., Vinny specializes in tenant and landlord representation for Colliers International, working directly with his clients in the acquisition and disposition of office space. For more commercial real estate insight and trends, follow Vinny on Twitter.