When looking at leasing office space for the first time, you may encounter a number commercial real estate terms that you’ve never encountered before.
If it seems confusing, it’s not your fault. The commercial real estate world is full of industry jargon.
Our goal is to provide you with the tools you need to speak the commercial real estate language and feel confident on your search for your new office space.
One of the most important and frequent terms you will come across during your search is “base rent.”
In this article, we will answer the following questions:
- What is base rent?
- What does base rent include?
- Can base rent be negotiated?
- What are base rent escalations?
What is Base Rent?
In a triple net or percentage lease, the base rent is the set rental rate that you will pay the landlord, before any additional operating expenses or revenue percentages each month.
For office leases, this rate is often quoted on a square foot per year basis, meaning that a 10,000-SF tenant paying a base rate of $20/sf will be paying $200,000 a year in base rent.
You will typically see this written out as $20 NNN + opex.
What Does Base Rent Include?
This is where the landlord will derive profit from the building. The base rent of a space is the most realistic indication of the market value of the real estate.
While other elements like your operating expenses are charged to cover the actual cost to own and maintain in the property, the base rent covers the cost the landlord incurred to purchase the building plus a premium to bring in revenue from the building.
Can Base Rent Be Negotiated?
Because of this, base rent it almost always negotiable, while set costs like operating expenses are not.
Typically, the higher the value of a property, the higher base rent the landlord will ask. However, the more leverage you have as a tenant, such as a long term lease requirement, a large size requirement, good credit, etc., the more you should be able to negotiate that rate down.
Find out why you should hire a tenant representation broker to help lead these negotiations: 7 Benefits of Hiring a Tenant Representation Broker
What Are Base Rent Escalations?
An escalation (also commonly called “bump”) is a marginal change that will increase the base rental rate of your space throughout the life of the lease. An escalation is a tool landlords use to protect themselves against inflation and changes in rental rates. An escalation only affects your base rate and is agreed upon during lease negotiation.
There are three types of escalations that you will typically see:
- Amount: Each year the base rent will increase by a specified dollar amount. In Austin, you’ll usually see annual base rent bumps between $0.50 to $1.00.
- Percent: Every year the base rent will increase by a specified upon percentage each year. In Austin, this percentage is generally between 2% and 3% annually.
- Indexed: Indexed escalations are based on current economic conditions instead of an agreed upon fixed rate. These escalations are typically tied to a measure of inflation like the Consumer Price Index.
This escalation benefits the tenant because your escalation is fully tied to changes in purchasing power and will not increase the profitability of the landlord throughout the lease.
Understanding your base rent is a great first step toward understanding your commercial lease.
To learn more about common office leasing terms, read our article Your Guide to the Elements of a Commercial Lease (Terms, Definitions). Or to learn more about rental rate structures, read Typical Types of Commercial Leases in Austin, Texas (NNN Lease vs. Gross Lease, more).