In CRE, net rentals represents the rental paid by a tenant for the use of her property to a landlord (aka property fund) or, if applicable, their representative (i.e. a property manager), every month.
It is generally one of the line items on the gross monthly rental invoice.
Net rental can be either be displayed as a rate per sqm of GLA rented per month, or a total monthly value.
Generally, but not always
- Net rentals = gross rentals – operating costs
- Net rentals excludes electricity and water, and excludes recoveries from the landlord
Note – there are no “hard and fast” rules in CRE generally (and, specifically, regarding the determination of net rentals by landlords). Prospective landlords can choose which expenses they include in their net rentals, and which expenses they push on to their tenants. The end lease terms and conditions are subject to negotiation** between all parties.
Net rentals exclusions
There are two types of expenses that will never be included in net rentals:
1. Expenses over and above the net rental, that are recovered by the landlord from the tenant
- Those expenses paid by the landlord to themselves or to third parties on your behalf, and recovered from you. For example: a) rates and taxes paid to the municipal authorities, b) generator ownership, maintenance and running costs borne by the landlord, c) security costs paid to a third party, d) variable expenses (like electricity and water) incurred on a multi-tenanted property, and allocated by the landlord to the tenants pro rata
- Note: The above expenses (except for electricity and water) are generally included in the gross rental number.
2. Expenses paid by the tenant to third parties other than the landlord
- For example, expenses such as cleaning paid to a cleaning company, or insurance of manufacturing equipment or office computers, or costs associated with maintaining a privately-owned backup generator, or the cost of fiber
- For example: electricity or water bills paid directly to municipalities (i.e. not to the landlord). Generally, in this instance, the property would be single tenanted
- Note: these expenses are generally excluded from a property’s gross rentals
** Our recommendation to industry outsiders
When signing or renewing a lease, consider leaning on the expertise of an independent, well rated, experienced CRE professional to advise you through the complexity. Here is an article unpacking just some of the complexities that need to be considered during this process.