Free Net Effective Rent Calculator (Excel)

Introduction 0:00 Net effective rent is one of the most important numbers in commercial real estate, and in 0:03 this video I’m going to make sure you fully understand what it is and how to calculate 0:07 it. 0:08 I’m also giving you a free calculator you can use to quickly calculate the NER and I’ll 0:11 also go through how to use it in this video. If you’re already comfortable with the differences 0:15 between net rent and operating costs, then skip this next part and jump forward to that 0:19 section. 0:20 Let’s first do a refresher on how commercial rents are calculated. This is an important 0:24 step as it plays a crucial part in calculating the NER. Net Rent vs Gross Rent 0:28 The majority of commercial properties have two quoted rates. 0:31 The first rate you’ll see is called either the base rent or the net rent, and it will 0:35 likely be quoted as a cost per square foot per annum. 0:39 So quick example, if a property is 10,000 square feet, and the net rental rate is $10.00 0:43 per square foot, then the net rent will be calculated as follows: 0:47 10,000 square feet * $10.00 per square foot = $100,000 in yearly rent. If you want to 0:53 get the monthly amount, simply divide this by 12. 0:57 Now in addition to the base rent, tenants will be responsible for their proportionate 1:00 share of the operating costs of the building. For industrial properties, this typically 1:04 includes property taxes, building insurance, common area maintenance and management fees. 1:09 Most industrial properties have separate utilities paid for directly by the tenant, but for office 1:13 or retail properties, some or all the utilities might also be included in this prorated share. 1:18 You might already have a solid understanding of how this works, but I want to make sure 1:21 this really sinks in. 1:23 Let’s say there’s a 40,000 square foot building which is broken down into four 10,000 square Operating Costs 1:28 foot bills. Let’s say the owner or property manager estimates the following expenses for 1:32 the upcoming year. 1:34 Property taxes: $100,000 Building insurance: $10,000 1:39 Common area maintenance: $25,000 Property Management Fees: $25,000 1:45 So the total estimated operating costs will equal $160,000. 1:50 Since each tenant occupies 25% of the building, they will be responsible for 25% of the costs. 1:56 So if we multiply $160,000 by .25, each tenant’s contribution will be $40,000. If we divide 2:03 this number by their size of 10,000 square feet, the operating costs, which is sometimes 2:07 called additional rent, will be $4.00 per square foot. 2:12 Adding base rent and the operating costs is often referred to as gross rent, which I’ll 2:16 touch on more when we get to the calculator. 2:19 One more important note, these numbers are estimates based on what the owner or property 2:23 manager expects those costs to be over the upcoming year, but once all the bills are 2:27 reconciled it may result in a shortage or an overage in the amount collected. If this 2:33 is the case, the tenant will be invoiced for the balance or receive a refund. 2:37 If there is one mistake I see new brokers or companies make more than others it’s not 2:43 fully understanding how this process works. Net Effective Rent 2:45 We can now move onto to talk about net effective rent, or NER. This calculation is very important 2:50 as it takes into account the concessions that a landlord would offer to a tenant. This could 2:55 include free base rent, free gross rent, which again is the base rent and the operating costs, 3:00 and it could also include any tenant improvement allowances. A landlord may also want to include 3:04 any leasing commissions or other financial incentives offered to the tenant, such as 3:08 paying for moving costs. NER calculator 3:11 Taking this all into account, let’s jump over to a spreadsheet which you can access in the 3:14 description below. I’ve actually added it 6:02 to a workbook I did another video on which includes an industrial property checklist, 6:06 rent roll and mortgage calculator. 6:08 I’m planning to continuously add to this workbook too as I genuinely want to provide as much 6:12 value as I can with this channel. 6:14 Thanks for watching, catch you in the next video!