The real estate industry seemingly has a language of its own. Veterans of the sector throw around words and acronyms that beginners might not understand. One of the many terms used in the sector is annual base rent, or ABR. It's an important one for landlords and real estate investors to understand. Here's why.
What is ABR, and how is it calculated?
Annual or annualized base rent (ABR) -- sometimes shortened to base rent -- is the minimum rent at the base year of a lease on a rental unit. It's usually a fixed amount, paid in 12 monthly installments, subject to an annual allowable increase as per the lease structure. The real estate sector most often uses this term in commercial real estate leases for things like retail or office space rather than residential properties.
ABR is the underlying rent a tenant pays to lease space each year. It's also the base rent used to determine the annual rent increase. However, it's not necessarily what they actually pay to their landlord. That's because ABR is the fixed rent before items like rent abatement, any capital improvement-related tenant reimbursements, and other items, like operating costs and CAM charges. In other words, it's the stated base rental rate for a property before any adjustments.
What does ABR include, and can tenants negotiate it?
ABR is a tenant's base rent on a commercial lease. Thus, it doesn't include any other charges like the real estate tax, insurance, operating expenses, or any adjustments like rent abatements or tenant improvement allowances.
Tenants can negotiate their initial rent. Most landlords advertise a property using what's known as asking rent, which is the set baseline ABR for a commercial lease. However, in competitive markets, landlords often offer incentives or concessions to secure a signed rental contract. These could include free rent periods, a tenant improvement allowance, and rate adjustments if a tenant didn't use a real estate broker. While these items don't impact the ABR on the lease, they can reduce a tenant's net effective rent on a property.
Why ABR is important for real estate investors
Even though ABR often isn't the actual rental payment a tenant makes to a landlord, it's a good baseline number to use as a reference point for evaluating real estate investments. For example, many real estate investment trusts (REITs) will provide a list of their top tenants by ABR. That allows investors to gauge the creditworthiness of their rent roll. If a sizable portion of a REIT's ABR comes from tenants in troublesome sectors (such as retail) or with low credit ratings, the REIT could experience issues down the road, as these tenants are at higher risk of not paying rent if market conditions deteriorate.
That makes ABR a good metric for a real estate investor to have in their toolbox to analyze investment opportunities. Investors can use that ABR analysis as a guide to help them determine what REITs to avoid by looking to see if a large portion of the property, portfolio, or company's ABR comes from potentially high-risk tenants.
ABR is an essential metric for real estate investors
ABR is simply the initial base rent that a tenant pays its landlord before adjustments. That makes it a useful metric to analyze the real estate sector, especially when comparing the rent rolls of different investment opportunities. It can help an investor spot a potentially troublesome investment well before it materializes in missed rent payments.