Base Rent

Base rent refers to the fixed amount that a tenant pays to the landlord for a rental property in a commercial lease arrangement. It excludes revenue percentages, utilities, and miscellaneous costs, such as additional operating expenses, including interest, maintenance charges, fit-out expenses, building service charges, and holding fees.

It decides the landlord's financial incentive and provides a basis for negotiating lease terms and structure. Moreover, it indicates a commercial property's market value ascertained based on various factors like supply, demand, location, size, features, condition, and amenities. It also acts as a benchmark for determining the base rent of other similar properties.

Base rent is the fixed sum that a tenant pays to a landlord in the commercial lease of a property. Also known as fixed rent, it excludes operating expenses, utilities, and revenue percentages. The various operating expenses and utilities not included in such valuation are property tax, repairs and maintenance cost, internet bill, water tax, water bill, electricity bill, insurance premium, gas and other energy expenses, etc. These are some expenses that the tenant needs to bear separately.

Emphasizing the base rent vs actual rent, the former is one of the components used to compute the latter amount. Also, talking about the base rent vs. gross rent, the latter is the total rental value of a property, including the former, additional charges like utilities and parking facility. It is evaluated on the basis of rental square feet, which includes the property's usable area, I.e., the office, private warehouse, or factory premises, plus the square feet of the shared premises like restrooms, hallways, lift, elevator, and parking area. Moreover, the fixed rent varies from property to property due to various factors like size, location, amenities, etc.

The primary need for a fixed rent is to determine the market value of the property in a particular area. Such rent serves as a benchmark for valuing other properties with similar features and located in the same vicinity. Moreover, it allows the tenants and landlords to negotiate over the lease terms, price, and structure. Also, a rise in base rent indicates the current condition of the real estate market for better decision-making by investors, policymakers, and real estate companies.

Base rent is a critical element in determining the actual rent of a commercial property on lease. The following factors influence it:

• Supply and demand: Market conditions, I.e., the requirement and availability of commercial properties for lease in a particular area, affect their value—a property with higher demand and lower supply results in surged base rent, and vice versa.
• Location: The location of a particular commercial property affects its rental rates. A premises located in a market area or one with high demand has a higher fixed rent.
• Property size: The fixed rent is measured by rental square footage; thus, the rent increases with the size of the leased property.
• Property condition: Well-maintained properties with various amenities can secure a better base rent than those that need to be kept in proper condition.
• Tenant creditworthiness: If the tenants have a good reputation and financial background, they could secure a lower fixed rate. However, the landlord could ask for more security deposits. 
• Amenities: The more features, benefits, or comfort that a property offers elevates its base rent.
• Length of lease term: The tenure of the lease also affects the fixed rent. More extended lease agreements have lower net rent due to more security.

The fixed rent is the one that serves as the basis for calculating the actual rent of a particular premises. Let us understand its relevance in commercial leasing with the help of the following examples:

Example #1

Suppose ABC Property LLC has a commercial building in the center of the city in the prominent marketplace. The base rent of a 1,000-square-foot office is $85,000, @$85 per square foot. It is higher than the $75/sq ft fixed rent of the other commercial properties in the city. The various factors that have resulted in this premium base rent include the high demand for commercial space in the city center, the well-maintained condition of the property, and the full-fledged amenities like separate parking, advertising space, lift, elevator, etc.

Example #2

Simon Property Group, a prominent U.S.-based real estate investment trust (REIT) specializing in shopping centers, reported fourth-quarter solid earnings driven by high leasing demand. The company's funds from operations (FFO) increased by 8.5% to $3.69 per share, surpassing analysts' expectations of $3.34 per share. Mall occupancy rose to 95.8%, and base minimum rent per square foot saw a 3.1% year-over-year increase. While Simon Property Group's shares gained 21.5% in 2023, they experienced only a 1% rise in extended trading. The company projects FFO per share for 2024 to be between $11.85 and $12.10, slightly below analysts' expectations of $12.20.

The base rent escalation clause in the commercial lease agreement states the percentage or amount by which the annual base rent will rise in every fiscal year from the initial base rent. Thus, according to this provision, landlords can periodically increase the base rent on commercial leases to adjust to changing market conditions and the rising rate of inflation.

The escalation can be determined in the following 3 ways:

1. Dollar Amount: It is a specific dollar increase in the total base rental value per year.
2. Indexed: It is evaluated using the Consumer Price Index (CPI) and other index measures that reflect the change in prevailing economic conditions.
3. Percentage: It is a percentage rise every year.