Looking to lease retail space in Austin, Texas? The decision to rent a commercial property can be daunting, particularly when it comes to the different types of leases and calculating budget Appropriately. This article will explore the difference between base rent and NNN, what NNN means, and provide insights into the average price of retail leases in Austin, along with broad guidelines on how much you should be budgeting for rent.
Base Rent vs. NNN: What's the Difference?
In the realm of commercial leasing, you will often come across the terms "base rent" and "NNN". Understanding what these mean is crucial to making an informed decision about your lease agreement.
The base rent is the monthly amount that a tenant pays for using the leased space. This calculation is broadly based on the per square foot cost of the commercial space. It’s crucial to note that base rent often refers to the bare minimum you’ll need to pay to lease the unit.
NNN, on the other hand, stands for Net, Net, Net lease. Also referred to as a triple net lease, this refers to the collection of additional costs the tenant needs to shoulder on top of the base rent. Typically, NNN includes property taxes, insurance, and maintenance costs of the premises. In essence, a triple net lease encompasses both the base rent as well as these extra overhead costs.
In a NNN lease, the tenant covers the property expenses for the use of the property. NNN breaks down into:
Net Property Taxes: The tenant’s proportionate share of the property’s real estate tax
Net Building Insurance: The tenant’s share of the insurance costs for the building
Net Common Area Maintenance (CAM): The tenant’s share of the cost to maintain common areas
While this may seem like an added burden, remember that NNN leases can also mean lower base rents since landlords are passing these variable costs on to tenants. Now, it's clear why understanding the difference between base rent and NNN is so crucial. NNN are not negotiable terms, they are pass through expenses that the landlord should strive to keep reasonable.
Average Retail Lease Rates in Austin
Austin's real estate market has been thriving, but this also means that rental rates are on the rise. As per recent reports, the city has hit an all-time high, with retail leases averaging around $29 per square foot (12/2023). Keep in mind that these rates fluctuate based on multiple factors, including the location and the size of the commercial space. High demand areas are more in the $50-60/SF range and as high as $90/SF.
Budgeting For Your Lease
Building out a space for your business will take an investment so that it truly reflects your brand. Getting a second generation space may give you an advantage to save on a few things but it is pretty rare that you will find a location that is turn key to open immediately unless you are purchasing an existing business. Budgeting for a renovation of a space or full buildout is unique to the property and your business needs. Getting a couple quotes for the work from local general contractors will give you the best estimates. Some landlords may offer T.I. (tenant improvement dollars) towards the cost of improving the building. The landlord usually will pay it in 2 installments, 50% during construction and 50% at completion after inspections. There are generally some strings, they usually will not cover the entire cost of the work needed and it is not for furniture or custom signage of your branding.
When budgeting for retail space rent, a good rule of thumb is to allot around 8-10% of your expected revenue. This guideline helps ensure that you're not stretching your resources too thin. A careful balance is key – while you want a retail space that suits your needs and attracts customers, overcommitting to a lease can put unnecessary strain on your finances.
For example, if you anticipate your business to generate a revenue of $1,000,000 annually, aim for a rent budget that falls between $80,000 and $100,000 per year.
Understanding the terminology and nuances around commercial leasing can take some time, but it's an essential step in making the best financial decision for your business. With the thriving market in Austin, retail space comes at a premium. So, take the time to break down base rent and NNN expenses, estimate a sensible budget based on your anticipated revenue, and find a property that will help your business flourish in Austin. Having an experienced Broker can help you navigate through it all and you can rely on their expertise to help you through the process.