It’s Always Time for Change

Back when our last blog post went up (yes, it has been a while!), we lived in a very different world. For Guiderock Commercial Realty, that time was a period of growth and evolution. As a company, we went through a lot of changes but also had a lot of forward momentum.

And then came March 2020. We did not shut down like many of our clients, but we were forced to address a substantial shift in the world. However, we remained a resource for our clients, other business owners, and the community. We gathered information, answered questions, and gave guidance where needed.

Six months later, we can say that things have improved, but much is still unknown. That’s always the case in business, though – we never have the certainty that we might like to have. As we move through the remainder of this disruption and prepare for future unknowns, we have a few thoughts that may help you navigate as well.

  1. Adversity also breeds opportunity. Remember the saying that “change is the only constant”? Just as this year doesn’t look like 2018 or 2019, the coming years will look different to us as well. As situations evolve, it becomes necessary to deploy different tools and resources. These changes also present opportunities to evaluate how you operate, make improvements, and develop new ways to support your customers. As we talked with our clients, we saw amazing resiliency and adaptability in the face of a substantial systemic shock.
  2. Plan for the bad when times are good. We see enough signs locally that we are optimistic about the ability of businesses to recover. In the future, when things are looking bright again, remember what happened this year and use that as a tool to keep preparing for the next downturn (in fact, you can lay the groundwork right now for those future contingency plans).
  3. Don’t go it alone. Entrepreneurship can seem lonely at times, but it really is a team sport. Make sure you have good teammates around you. Of course, this will include the business partners that you rely on for services like accounting and legal advice. Look also for mentors and friends who can help give you a different perspective. And be prepared to be a good teammate yourself and give back to others.

As you take stock of your current situation and begin thinking about your next stage, we hope you see positive signs for your own business as well. Please reach out to us with questions – we can connect you with other organizations and service providers to help you with your specific situation.

Blog Leases

Understanding Net Effective Rent

One of the common issues with negotiating a commercial real estate lease is balancing the perspectives of both the tenant and the landlord. Understanding net effective rent and how it relates to each party in the transaction can help build a foundation for coming to a reasonable compromise on lease terms.

What Does “Net Effective Rent” Mean for a Tenant?

For businesses, rent is often one of the biggest expenses incurred, and it extends beyond just the amount specified for the base rental rate in the lease. Net effective rent for a tenant will also include additional recurring charges specified in the lease as well, most often in the form of estimated NNN charges but may also include marketing fees or other reimbursements due to the landlord. These additional costs are typically identified as “Additional Rent” and are due along with the monthly rental payment. The net effective rent for a tenant will also include rental reductions such as free rent periods at the beginning of a lease. Taken together, these costs represent the tenant’s net effective rent, or the total amount that will be paid to rent the space.

What Does “Net Effective Rent” Mean for a Landlord?

For property owners, net effective rent is the base rent due under the lease agreement minus costs incurred by the landlord as part of leasing the space such as free rent concessions, broker commissions, and construction costs for tenant improvements. The difference between what is owed by the tenant and these upfront costs is the amount that the landlord has available to pay its mortgage, accrue reserves for capital improvements, and generate a return on the real estate investment.

Meeting in the Middle

Understanding what net effective rent means for both sides of the negotiation provides a foundation for coming to mutual consensus on the structure of the lease. Tenants can evaluate the costs of renting and understand how that compares to the overall market, while landlords can make sure that they are able to meet expense obligations and achieve their desired return.