Commercial Rent Explained

When looking at commercial space for lease, rent is usually the first thing people think about, but it's not always just one number. It might only be the base rate, or it could include additional factors all bundled together under the category of rent. It depends on the type of lease and the property itself.

Quoting Commercial Rent in Hawai'i

Every state has its own way of handling rent and lease disclosures. What's standard in one place may look very different elsewhere. Here in Hawai'i, there are specific requirements for who can quote rent and how it's presented. By law, only a licensed real estate professional is permitted to quote rent in Hawai'i. This can create confusion, since tenants often ask landlords, receptionists, or even property staff for the rent amount. At the same time, some landlords prefer to advertise their own spaces. To stay compliant and avoid miscommunication, a good practice for landlords is to state that 'rent is negotiable' and then forward inquiries to a licensed property manager or broker. It's also important that the management company's website reflects accurate and updated rent information, so that anyone looking for details can be directed there quickly and confidently.

Base Rent – The Starting Point

Base rent is the starting point, typically calculated on a per-square-foot (PSF) basis. For example, a 1,000 SF space at $2.00 PSF per month equals $2,000.But the lease doesn't stop there. Most commercial agreements include additional rent and other costs that affect the total payment.

Additional Rent

Additional Rent may include:

·       Common Area Maintenance (CAM): A tenant’s share of property upkeep, such as landscaping, parking lots, exterior lighting, and janitorial services.

·       Property Taxes & Insurance: Often bundled with CAM, but sometimes listed separately.

·       Utilities: These may be paid directly by the tenant or billed back by the landlord.

·       General Excise Tax (in Hawai‘i): Applied to both base rent and additional rent.

Note: It's important to keep in mind that CAM charges are usually estimated and then reconciled at the end of the year. Depending on actual expenses, a tenant may receive a credit or an additional invoice. This is a normal part of commercial leasing and helps ensure costs are shared fairly. (For more detail, see our [post on CAM charges].)

Rent Increases

Most commercial leases include built-in rent increases. They can take different forms, such as: a set dollar increase each year, a fixed percentage increase (e.g., 5% annually), or an adjustment tied to an index like CPI. Both parties should note these increases upfront to avoid surprises.

Free Rent

Some leases include "free rent" or rent abatement, but this is relatively rare. It typically arises when a space has been vacant, when a landlord seeks to make a property more competitive, or when a tenant requires assistance in offsetting moving and build-out costs. In these cases, base rent may be waived for a short period, but tenants are often still responsible for CAM, utilities, or taxes during that time.

Example: NNN Lease Breakdown in Hawai'i

Here's a quick look at how rent might add up for a 1,000 SF space under a triple net (NNN) lease.

Item	Calculation	Monthly Cost
Base Rent	$1.00 PSF × 1,000 SF	$1,000
CAM Charges	$0.40 PSF × 1,000 SF	$400
Hawai‘i General Excise Tax 4.712%	4.712% of $1,400	$66
Total Monthly Payment		$1,466

This is a simplified example to illustrate how rent could be structured under a NNN lease. Actual terms will vary depending on the type of lease. (For more on CAM, see our [post on CAM charges].)

Other Rent Structures to Know

Lease Types (Gross, Modified Gross, NNN): The type of lease determines how rent is structured and who pays for which expenses. A Gross Lease may bundle everything into one payment, while a Triple Net (NNN) Lease separates base rent from operating costs. A Modified Gross Lease falls somewhere in between, with certain expenses included and others passed through to the tenant.

Percentage Rent

Retail and restaurant leases sometimes include a percentage of sales, adding a performance-based component to the rent. Tenants pay base rent plus an additional percentage once sales pass a certain threshold, aligning rent with business performance.

Percentage rent can also be structured in different ways. Sometimes it applies to all sales, and at other times, only to sales exceeding a set breakpoint. For example, a lease might require tenants to pay 5% of all gross sales, or 5% only after sales exceed $40,000 in a given month.

Because the formulas can vary, it's essential for tenants to carefully review the lease language and run the numbers in advance. A slight change in how percentage rent is calculated can make a big difference in monthly costs. For landlords, percentage rent ties income to tenant success, but for tenants, it's essential to understand how the obligation is triggered and budget accordingly.

Example – NNN Lease with Percentage Rent

Item	Calculation	Monthly Cost
Base Rent	$1.00 PSF × 1,000 SF	$1,000
CAM Charges	$0.40 PSF × 1,000 SF	$400
Percentage Rent	5% of $15,000 (sales over $40,000)	$750
Hawai‘i General Excise Tax 4.712%	4.712% of $2,150	$101
Total Monthly Payment		$2,251

Note: This example shows how base rent, CAM, percentage rent, and Hawai'i's general excise tax can all combine to determine the actual monthly payment.

Land Leases in Hawai'i – A Different Kind of Rent

In a land lease, also known as a ground lease, the tenant leases the land itself rather than a built-out space. The tenant is often responsible for constructing and maintaining their own improvements on the property, which revert to the landowner upon the lease's end. Rent under a land lease is typically structured as base rent for the land, often calculated on a per-square-foot basis, similar to commercial space. However, because the tenant controls the improvements, there are usually fewer 'additional rent' charges like CAM or operating expenses. Property taxes, insurance, and maintenance of any improvements are often the tenant’s responsibility. Land leases are typically long-term, ranging from 20 to 30 or even 50 years, so rent schedules often include regular escalations to account for inflation and long-term property value changes. For tenants, this arrangement allows them to control a property without purchasing the land. For landlords, it provides a steady income and preserves ownership of valuable land.

Commercial rent is a structure shaped by the lease. Base rent, additional rent, operating expenses, taxes, and scheduled increases are all outlined in detail, often accompanied by a separate addendum. For tenants, understanding the lease helps with accurate budgeting and long-term planning. For landlords, it ensures the property's operating costs are properly covered. In every case, the lease is the guide that defines how rent is calculated and collected.

Ultimately, the written lease governs all rent terms. Verbal agreements or informal numbers don't override what's signed, making it essential for both parties to review the lease carefully.

If you need guidance on reviewing lease terms or understanding rent structures in Hawai'i, the team at Big Island Commercial Properties can assist you.

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