You have dreamed about a custom home, one with a shimmering pool in your tropical paradise backyard, a media room tricked out with the latest technology, and a double-height den for your hunting trophy displays. While you lie by that imaginary pool, cursing the economy and current stringent credit requirements, extend that customization dream to something just as appealing for your business–custom office space.
Build-to-suit office space has the allure of an office environment exactly suited to a business’s needs. It is defined as a building specifically constructed to the design and physical specifications of one user, at the user’s chosen location. This kind of arrangement broadens location choice, provides superior space efficiency, and allows the company to better build its brand.
When a company finds that its current space will not be adequate for future growth, it has four options.
1) The business owner might lease or sublease vacant space from available office space. This method is probably the least expensive and the least complicated option, but it limits the business to what is available in the current market.
2) The second possibility is to acquire and renovate an existing building, which is a good option for a business with good credit, presuming any of the existing buildings were a good match.
3) The company might buy land and build its own facility, an alternative that requires extensive capital. With this option, the business owner assumes all of the risk of owning the building.
4) Build-to-suit is another alternative, where a business owner approaches a developer with specifications for the ideal office space. The developer constructs the building and leases it back to the user. This takes the burden of risk off of the business owner and allows him or her to invest the capital saved back into the business.
Is Build-to-Suit Office Space for Me?
Building to suit is not for every company. While leasing existing office space might take six months to a year, depending on company needs, building to suit is a several year process, and therefore requires a long term commitment. Before building, available land must be found, a good developer selected, the design process and construction negotiations begun, and all of this before the foundation is poured. In addition, because the developer is constructing a customized building for one user, the lease term is usually a minimum of ten years in order to spread the risk over a longer period of time.
Pros and Cons
If a company is able to make such a long term commitment, however, build-to-suit leases can be an outstanding option with many advantages:
- Location. Build-to-suit means the company can choose its location, rather than making do with what is available. These buildings are most often constructed in vibrant, high-growth areas with excellent access.
- Space efficiency. Because the building is built to your specifications, it has just the right amount of open space to private office space. The flow of access between departments is ideal for the daily workings of the business. Being able design the office around your business creates maximum space efficiency.
- Brand. Your company’s image and personality should be reflected in your office space. Build-to-suit is uniquely suited to display your brand in the colors, finishes, and architectural design of your space.
- New building systems. New buildings have the latest in modern systems, like HVAC, plumbing, electrical, and lighting. They completely avoid the questionable charm of cobbled together fixes and patches that come with older buildings.
- Energy efficiency. With these new systems come cost-saving energy efficiencies. The latest technology for HVAC, lighting, and plumbing fixtures translate into less wasted water and electricity, and more dollars saved.
- That new building smell. In the search for office space, every business owner has toured the unit with frayed carpet, stained ceilings, and odd and mysterious odors. A new building has none of these defects to distract the client from what you offer as a business.
The cons we’ve already discussed in part. Build-to-suit office space is a long-term commitment, and one that requires excellent credit to procure financing. It is significantly more expensive than finding and leasing vacant space, but companies may realize savings in efficiency, reduced operating costs, and an improved image among clients.
Every once in awhile, a tenant needs to leave a space before the maturation of the lease term. Various factors such as market fluctuations or force majeure events can force you and your business to evacuate a space early. In order to prepare for this contingency, it is crucial to build assignment or sublease language into a lease, giving you some options if an early departure ever comes up in an office space.
Assignment vs. Subletting
While they are often conflated, assignment and subletting are actually two very distinct practices. With assignment, the original tenant’s rights and obligations under the original lease are transferred or assigned to the new tenant. With subletting, on the other hand, the responsibility for the lease remains the original tenant’s. Landlord’s often feel safer with a subletting situation since two tenants become liable for the property.
Assignments are usually high risk for landlords since they may be concerned that the new tenant does not fulfill certain requirements, such as financial stability, credit worthiness, etc. With a sublet the burden is on the original tenant ultimately, but with an assignment, a landlord must re-vet a tenant. A new tenant must be demonstrated to be as reliable financially as the original tenant in order for most landlords to approve an assignment.
Issues with Assignment and Sublets
When it comes to executing sublets or assignments, both the tenant and the landlord must consider several factors, including:
- the solvency and character of the parties involved
- whether the terms are changing
- the obligation of the original tenant
- whether sublease rental fees will exceed the scheduled rent
- whether any costs to the landlord with be paid by the tenant
Tenant and Landlord’s Rights in Assignments and Sublets
When negotiating a commercial lease, the lease should contain language that specifically defines the tenant’s right to either assign or sublet an office space. Most balanced leases will also contain language stating the landlord’s right to refuse the assignment or sublease. This language should define the basis on which a landlord can accept or deny a new tenant.
Landlords may also request:
- approval of the proposed use of the office space
- tenant payment of legal and financial analysis fees incurred by the landlord during the review period
Keep in mind that landlords are typically more amenable to a transfer or sublet when the new tenant is somehow affiliated with a business. Bringing in a familiar and responsible party is much more likely to result in an approved assignment or sublease and can give you the flexibility you need to make changes when necessary.
Many business owners feel confident (and rightly so) that they know more about the ins and outs of their business than anyone. Making autonomous business decisions can be readily done by business owners in many milieus, but not necessarily in the world of real estate and negotiating leases.
Finding the right location for a company and negotiating a lease that doesn’t leave any money on the table is a complicated process, and one that has taken down even the most confident business owner. Moreover, a landlord of a commercial space will always have a professional broker working on his or her side. Why shouldn’t you have one on yours? A landlord may well hesitate to offer a questionable deal when he sees competent and experienced professionals across the table.
Types of Brokers
Brokers come in two categories usually: tenant brokers and landlord brokers. Landlord brokers represent commercial spaces and building owners Tenant brokers specialize in helping the tenant during negotiations and will not have a conflict of interest when finessing a deal with a landlord.
What Tenant Brokers Do
Working with a tenant broker, also known as a tenant representative can streamline the location selection process and take much of the burden of negotiations off your back. Additional benefits include:
- Cost savings during negotiation
- Thorough analysis of your company’s space needs
- Take over cumbersome and lengthy paperwork
- Create a healthy distance between you and a landlord
- Finesse a good deal for you beyond the standard rental rate negotiations
- Create a portfolio of feasible locations within your budget
- Negotiate terms that work for you today and into the future
Hiring on someone who specializes in finding offices and negotiating leases can make a big difference to your bottom line in the long run. Instead of taking on your next office lease negotiation on your own, consider working with a professional who can negotiate terms that answer your short and long term needs.
One of the most clouded concepts in commercial real estate for many tenants is the idea that they are, in fact, paying for more space than they actually “use.” Landlords use a formula to set a rental rate that factors in both the actual space being used by a tenant and that tenant’s share of all common areas in the building.
Usable Square Footage vs Common Areas
Usable Square Footage
The useable square footage of an office space is essentially the space your company occupies. In many cases, this space is determined as if any recesses or structural elements such as columns are not there. With large-scale tenants who occupy entire floors or several floors, rental rates include all the restrooms and maintenance closets and rooms on the floor in their usable space.
Both small and large-scale tenants play some portion of the shared areas within a building. These can include large central areas such as a lobby or restrooms and elevator areas. Common areas can be divided into two categories:
Floor Common Area: common areas on a specific floor. A tenant’s share typically averages out at eight percent of the floor.
Building Common Area: common areas in the overall building space. An average tenant share of this can range from six to eight percent.
It is important for tenants to understand that landlords often include the floor common area and the building common area as the “common area” factor in their equations. This means that a tenant’s share of “common areas” can range as high as 20 percent.
Rentable Square Footage
The rentable square footage times the lease rate per square foot is what you will end up paying on your lease. What is the rentable square footage? Well, if you are a standard tenant and not a full floor/multi-floor tenant, your rentable square footage is your usable square footage times the floor common factor times the building common factor. In other words:
rsf = usf x (1 + Add-on %)
As an example, let’s consider a tenant looking for 10,000 square feet of office space. The add-on factor (both the floor and common) is 15% for that building. The rentable square footage would be:
10,000 x (1 + .15) = 11,500 rsf
Some landlords in various markets may use a different factor than an Add-On, such as a common area factor. Always confirm whatever factors and calculations your landlord is using to determine your RSF. Do this before signing a lease– any discussions after that will be moot. While leases do not detail the calculation method used necessarily, many landlords may well agree to language in the lease that states that the measurement of a leased office can be verified by a professional, such as an architect, in line with some acceptable industry standard like the BOMA standard. You will also want your tenant broker to confirm that the common area factor your landlord uses is actually based on relevant and realistic dimensions.
So when you are running your search for a new office space and comparing buildings, make sure that you consider the common area factors and how they are adding or detracting from the overall value of a space. To parse the finer points, consider working with a tenant representative to really get a detailed analysis of an office space’s cost efficiency and the benefits it will bring your business.
Knowing the difference between usable square feet and rentable square feet can mean all the difference in evaluating the best deal on a commercial lease. Office space is generally listed with a rentable square footage rate, which includes more square feet than the actual space the tenant will occupy. So how can a company know what it is paying for, and get great space for the best price?
Usable Square Feet
Usable square feet includes the specific area the tenant will occupy in order to do business. For a partial-floor lease, this includes all office space plus any storage or private restrooms. There are no exclusions for columns, recessed entries, or the like, either–column space is fair game in the calculation of total usable square feet. When a tenant occupies a full-floor, the usable square feet amount extends to everything inside the boundaries of the building floor, minus stairwells and elevator shafts. This can include non-usable areas like janitorial closets, or mechanical and electrical rooms. It also encompasses private bathrooms and floor common areas, like kitchenettes, hallways, and reception areas that are specific to that floor’s use.
Rentable Square Feet
A commercial office building is not made up of private offices and cubicles alone. Corridors, meeting spaces, lobbies, stairways, restrooms and so on are used by all building tenants, and landlords charge for the use of this space as well. Rentable office space means the usable square feet of the office space plus a pro-rata share of building common areas. Pro-rata means that tenants pay for these common areas in proportion to the amount of space they lease in the building.
To calculate rentable square feet, landlords use what is called a load factor (also called a common area factor, or an add-on factor). This number is based on the percentage of common areas found in the building. If a building has a total square footage of 100,000, with 85,000 usable square feet (which is to say 15,000 square feet of common areas), the load factor would equal to the rentable square feet divided by the usable square feet, or 1.15.
Building Rentable Square Feet ÷ Building Usable Square Feet = Load Factor
100,000 ÷ 85,000 = 1.15
This load factor is then multiplied by individual tenants’ usable square feet to come up with the total rentable square feet. If a company desired to lease 5,000 usable square feet, for example, this number would be multiplied by the load factor of 1.15 to reach the number of rentable square feet:
Tenant Usable Square Feet x Load Factor = Tenant Rentable Square Feet
5,000 usable square feet x 1.15 = 5,750 rentable square feet.
The rentable square foot amount would then be multiplied by a rental rate to come up with the company’s total annual or monthly rent.
Knowing this formula helps companies to evaluate their best deal for office space. Suppose a company compared two 5,000 usable square foot office spaces with the same rental rate from two buildings with load factors of 1.15 and 1.20.
5,000 usable square feet x 1.15 = 5,750 rentable square feet
5,000 usable square feet x 1.20 = 6,000 rentable square feet
In the first building, the rent would be based on 5,750 square feet, whereas the second building would charge rent based on 6,000 square feet. The building with the lower load factor would save the company significant money.
On the other hand, the company may decide that the extra money is worth the larger, fancier lobby, or more spacious kitchenette. It could be the company’s best decision to value the amenities more than the extra cash. The important thing is for companies to do a little math and figure out exactly what they are paying for in order to make intelligent decisions about value.
Load factors, often represented as a percentage, commonly range between 10% and 20%. Often a partial-floor tenant will pay a floor common area share as well, in order to pay for use of the floor’s corridors and bathrooms, etc. The landlord will calculate the tenants usable square feet times the proportion of space the tenant occupies on the floor to come up with a floor rentable square feet figure; that number is then also multiplied by the building’s load factor.
Building Owners and Managers Association International (BOMA)
Most leases and landlords utilize the Building Owners and Managers Association International (BOMA) standards for measuring buildings. The lease should specify that measurements were taken according to these standards. If leasing a lot of space, tenants would be wise to hire an independent professional to verify usable square feet and rentable square feet figures. Errors are common, and can add up to a lot of money over the course of a lease.
Read the Lease, Do the Math
To get the best value office space, prospective tenants will make like college students, and do their homework. Company X evaluates Building A with 10,000 rentable square feet and a load factor of 1.10 and Building B with 10,000 square feet and a load factor of 1.15, paying the same amount of rent for each building. With a little investigation, Company X discovers that Building A provides them with 9,091 usable square feet–nearly 400 square feet more than Building B’s 8,696 usable square feet. Those 400 square feet could house a few more personnel, or make one more nice executive office for upper management. In short: read the lease, do the math, and find the best value for your company’s office space.
LEED, which stands for Leadership in Energy and Environmental Design, is a green building rating program. It operates under the umbrella of the U.S. Green Building Council (USGBC), a non-profit coalition of building industry leaders. The goal of the rating system is to encourage and reward sustainable design across several metrics—sustainable site choice, energy savings, water efficiency, reduction of CO2 emissions, and indoor environmental quality, among others—all while improving company profitability and employee well-being.
Since its inception in 1994, the LEED rating program has become industry standard for excellence in sustainability. LEED motivates professionals throughout the industry to step up their green game, including real estate professionals, facility managers, engineers, interior designers, landscape architects, construction managers, private sector executives, and government officials.
The LEED rating program is a four-tiered credit-based system that awards points based on compliance with different aspects of sustainability. A basic LEED certification is awarded if a building amasses between 40 and 49. LEED Silver and Gold certifications are 50-59 and 60-79 points respectively. The highest LEED certification is LEED Platinum, awarded to buildings that attain 80 or more points.
Building owners can apply to be certified within four different LEED categories. Building Design and Construction (BD+C) encompasses new construction and major renovations, such as major HVAC retooling and other significant building modification. Core and shell projects also fall under this classification, where the developer controls mechanical, electrical, plumbing, and fire protection but not interior build-outs. Buildings of every type can register under BD+C, including schools, retail, data centers, warehouses and distribution centers, hospitality, healthcare, and even private and multi-family homes. LEED-NC (new construction) and LEED CS (core and shell) are the primary commercial certifications from the LEED BD+C category.
Interior Design and Construction (ID+C) covers complete interior fit-outs for office space, retail, and hospitality. This certification is for project teams which may not have control over building operations, but which want to create interior space that is better for the planet and for the people who work there. LEED CI (commercial interiors) is a common certification for commercial office and retail projects under the ID+C heading.
A third category of LEED certifications is Building Operations and Maintenance (O+M). This category is for existing buildings that are improving sustainability in operating systems and other building aspects. Bringing an old, inefficient building into sustainability has less impact on the environment than constructing a brand new sustainable one. Existing buildings can be office space of any kind: retail, schools, hospitality, data centers, and warehouse and distribution centers. The LEED EBOM (existing buildings operations and maintenance) certification comes from the O+M category.
Two other categories of LEED certification are Neighborhood Development (LEED ND certification) and Homes (LEED H certification). The neighborhood development certification is for neighborhood level projects, as in designing walkability, green spaces, etc. LEED Homes is for single family, low-rise or mid-rise multi-family structures.
Should you think big as you start your office search? Or is thinking small the better choice? It’s actually a crucial question: Will the needs of your business be better served by a smaller office? Or are you confident enough in the potential growth of your company that moving into a larger office space makes sense?
To answer these questions you’ll need to take a close look at the pros and cons of both large and small office spaces. You’ll also need to make an honest assessment of your business to determine whether thinking big or thinking small makes more financial sense.
Many small business owners, especially those with relatively new businesses, like to start small when it comes to leasing office space. Not only do they want a small space for their business, they always want a shorter-term office lease.
The benefits to this are fairly obvious. Smaller offices cost less. If owners find that they have to shut down their businesses, they won’t be out quite as much money as they would have been if they had invested in a larger, more costly, office space. Newer businesses tend to have smaller staffs and less equipment. If this is the case, a smaller office space makes more sense. At the same time, many newer small business owners choose a shorter-term office lease, maybe one that lasts one or two years before renewal time.
The main benefit of this approach? It gives business owners the maximum amount of flexibility. Owners can more quickly move to another office if their business should succeed and grow. Of course, the small approach does come with its own potential pitfalls. Your business might grow so rapidly that it becomes cramped in its small space. And taking out a short-term office lease can be costly; many landlords charge higher rents-per-square-foot when issuing out short-term office leases. It’s a way to cover the time and costs of finding a new tenant after just a one- or two-year period.
Searching for larger office space comes with its own set of pros and cons. On the plus side, larger office space gives your small business the opportunity to grow. If your business succeeds, you can simply use more of your existing office space. You won’t have to search for a new office to call home.
A larger office space also allows you to more easily add new equipment without crowding your staff members. It also gives you flexibility to add meeting rooms, more comfortable waiting areas and other amenities that might not fit in a smaller office space. And what if you think big in another way, by taking out a long-term rather than a short-term office lease? Again, there is a significant benefit by going this route. You’ll have more stability. You know that your business has found a long-term home, and that you won’t need to waste time searching for a new office space just one or two years in the future.
At the same time, your rent per square foot might actually be cheaper if you take out a long-term lease. It’s the opposite of what happens when you take out a short-term lease: Landlords will charge you lower rents-per-square-foot because they won’t have to spend time searching for a new tenant after just one year. As with leasing a small office on a short-term basis, there are also negatives associated with going big. If you rent a large office, you’ll have to spend more. There is simply more square footage to pay for. And if you take out a long-term lease, you’ll lose the flexibility that comes with shorter leases. Maybe after two years, you’ll want to move to a new neighborhood, one that’s more attractive to your clients. Doing that can be costly if you still have five years left on your existing long-term lease.
Analyzing your business
Finally, before making any decisions on small or large office space – or short-term or long-term leases – take a careful look at your business. How much do you believe that your business will grow in the next year? How much will it grow in the next five years? Do you meet regularly with clients at your office, or does most of your client interaction take place over the phone or through e-mail? Will you need a larger number of staffers in the coming years?
The answers to these questions can help you determine whether thinking big or thinking small makes more sense for your business. Don’t skip this analysis. It’s the only way you’ll know for sure that you’ve made the right leasing choice.
When entering into a commercial lease agreement, many business owners and potential tenants may be familiar with some of the general business issues involved. These basic lease terms include:
- the rental rate
- a build-out allowance
- operating expenses
- the length term of the lease
In addition to these basics, however, there are many more complex terms involved in a commercial office lease that involve complicated negotiations and demand a seasoned touch. While some business owners may choose to go it alone, the guidance of a qualified team, including a tenant representative and legal counsel, can make a big difference in parsing these finer points.
To give you an idea of the additional complexities involved in an office lease, let’s look at some of the other points which can come up during negotiations.
Green lease issues
Many businesses are endeavoring to undertake a more responsible approach to operations and trying to implement “greener” practices. As such, many tenants seek to include environmentally responsible clauses within a lease, addressing:
- reduced consumption
- safe and efficient removal of waste
- more sustainable work environments
With the high prioritization of advanced communications in business today, many businesses need to pay special attention to lease details relating to the set-up of their communication system. These include:
- Access to risers – covering the tenant’s ability to access and implement the space neeed for fiber optic cabling
- Access to rooftops – addressing the installation of satellite and microwave antennae on a building’s roof space
- Implementation of redundancies – creating a back-up power supply to computer systems in case of a building power failure
These crucial additions can come at additional costs, so negotiating these finer points can make a sizable difference to a company’s bottom line. Landlords may also wish to exert their right to approve each such implementation, so a tenant should make sure that they discuss thoroughly the implementation and use of such additions.
These are just some of the issues that can come up in an office lease negotiation. Making sure that you are well-briefed and prepared to negotiate these issues, ideally with the aid of a professional real estate team can make a big difference to your lease over the long term.
Finding and negotiating a lease on an office space can be a lengthy and complicated process that can leave a lot of money on the table if not pursued in the best way possible. Leasing mistakes tenants make can end up working against them. The following are some of the most common errors that tenants should keep an eye out for:
- Putting costs above all else
- Leaving negotiations to the last minute
- Not having a good idea of your company’s space requirements or moving forward without sufficient space planning
- Hesitating once a good offer is on the table and losing the opportunity
- Not working with a real estate team, including a broker, a tenant representative, an architect, and more
- Making decisions without clearly defined real estate and business objectives
- Not using a project leader in-house for the search and negotiations
- Not giving yourself a buffer at the maturation of a lease to address “make good obligations”
- Not preparing for potential expansion needs
- Not incorporating exit strategies into a lease, i.e. termination or contraction options
Reducing cost when it comes to office space is essential for many businesses and companies. After all, real estate costs can rank as high as second or third on the list of a company’s highest expenditures. The following tips are proactive techniques businesses can use during the earliest stages of finding office space to help reduce costs.
- Don’t hesitate to heighten the stakes during negotiations: Creating a sense of competition between potential landlords is an essential part of negotiating a new lease or re-negotiating an old one. Businesses looking to have an advantage in negotiations should make it clear that they are looking at multiple spaces. Revealing too much information is not necessary and, in fact, can be detrimental. Simply revealing that there are other options on the table will suffice.
- Tailor a space to your needs: When looking for a new space, it is crucial for businesses to get not only the right amount of square footage, but also the right layout within a given square footage. One 5,000-square foot space is not necessarily the same as another 5,000-square foot space, as varying layouts and different common areas can greatly affect a space’s usability. Work with a space planner before beginning a search to determine the ideal size and layout for your company’s needs.
- Give yourself sufficient time: Smaller-scale tenants should have a 6-month buffer between beginning a search and moving. Medium-sized tenants should start prepping for a move as many as 12 to 18 months ahead of time. For large-scale, corporate entities with hundreds of employees, prep time should begin as early as two to three years before a move.
- Make sure you factor in construction and build-outs: Pay careful mind to any build-out costs or construction overhead that will factor into the bottom line of a move. Many tenants run into financial surprises when they forget to consider design issues such as build-out costs and do not make the effort to gather competitive bids for any construction needs associated with relocation.
- Consider the entire concession package: While the monthly rental rate is tremendously important, it is also important to consider the entire concession package when making a decision on a location. Issues such as build-out allowances, rent abatements, or relocation allowances can make a big difference in the long run.
- Be sure that you have adequate representation: Don’t rely on in-house services (such as an architect) offered by a Landlord. Assemble your own team of professionals and consultants to advise you during the evaluation process. Brokers, architects, and contractors should all be on your side and working with your best interests at heart.
- Pay attention to the specifics of the renewal option and the sublease provision: Even though the renewal option will not be a concern in the short term, it is still financially beneficial and important to consider it during the evaluation process. Factors such as notification periods and rent penalties can affect a bottom line big time in due course. Paying special mind to the sublease provision can also enhance the marketability of a space if business conditions require subletting a section of your square footage.
- Try to build room for adjustment into a lease: While many leases are long term, business conditions can vary greatly from one quarter to the next. Having some flexibility built into a lease may just be a saving grace in tough times. You also want to mitigate your losses in any worst case scenarios such as interruption of services, natural disasters, or building condemnation.
You’ve found the perfect office space. It sits in the ideal neighborhood for your business, one with easy access to major roadways and a large amount of foot traffic. The space is large enough to accommodate your business’ planned future growth, but not too large so that you’re paying for space that you’ll never need. Best of all, your new landlord has quoted you an affordable monthly rent, one that fits comfortably within your budget. Be careful, though. That monthly rent might not be as low as it seems. Too many tenants make the mistake of overlooking the hidden costs that can come with a new office lease.
Here are some of the most common hidden costs that business owners overlook when signing an office lease. Be on the lookout for them to make sure that you don’t put your business in a financial hole.
Someone has to plow your building’s parking lots during the winter. Someone has to cut the grass and repave cracking driveways. And someone has to pay for these services, too. Who pays and how much should be included in your office lease. Some leases might state that the building owner is responsible for covering these maintenance costs. Others will spell out a payment structure shared by the building’s owner and its tenants. If you don’t notice the monthly maintenance fees that come with your new office, you run the risk of blowing your business’ monthly budget.
What if your office building needs a new sprinkler system? What if the bathrooms need an overhaul to meet the requirements of the Americans with Disabilities Act? Again, someone has to pay for these upgrades. Depending on your lease, you might be at least partially responsible for them. Again, it’s important to understand this before you sign the lease. Building upgrades are rarely cheap, and they can place a significant burden on your business’ monthly expenses.
Some office leases contain clauses giving building owners the right to conduct an electrical survey of your office. During such a survey, contractors will chart how much electricity your office actually uses. Your landlord can then factor this usage into the amount you pay each much for electricity. Be warned, though, some electrical surveying firms will figure the total amount of electricity that your office would consume each month if every piece of equipment – all your computers, lights and copy machines – were running all full capacity. This will result in a higher monthly electrical usage than is realistic, and could unnecessarily boost your monthly utility bills.
If you have a growing business, you might not expect to stay in your new office space for too long. Be careful, though, of pre-existing condition clauses. These clauses state that you must return your office space to its original condition after you vacate it. In other words, you’ll have to remove any new walls you’ve installed or any new lighting. You’ll have to return your now bright-red office walls to their former dull beige. All of this costs money, and can significantly add to your business’ expenses when it’s time to move to a new office.
Operating expense increases
Most office leases will include clauses giving landlords the right to increase your monthly rent by a certain percentage each year. In theory, your landlord might have to pay more each year to maintain your building as the costs of labor, equipment and materials rise. The annual rent increases help your landlords cover this expense. Make sure that your lease doesn’t allow your landlord the ability to raise your monthly rent by a large percentage each year. That can quickly turn your once-affordable space into a financial burden.
Depending on your lease type, you might have to pay a portion of your office building’s property taxes. Make sure that you’re not paying too much. Ideally, the amount of money you pay for property taxes should be directly related to how much of the office building that you occupy.
The good news? It’s not you. At least, not directly. Think of the relationship between home buyers and their real estate agents. It works much the same way as does the relationship between you and your office broker. Residential real estate agents don’t get paid until their buyer clients find a house and sign the closing papers. And when this happens, it’s the seller of the home – the property’s previous owner – who pays the agent’s commission through the proceeds of the home sale.
It works the same in an office lease. Your office broker won’t get paid until you sign a lease. And the owner of the building in which your office space sits will be the one issuing a check to your broker.
Two kinds of brokers
As you search for office space, you’ll most likely meet two types of brokers: the tenant rep and the listing agent.
The listing agent represents the owners of buildings, the people who are leasing out office space. Their job is to negotiate the best deal – they want their clients to get the highest monthly rent, for example – on behalf of building owners.
You’ll be working with a tenant rep. These agents work with clients who are looking to lease or buy office space. Their jobs are the opposite of listing agents: They want to get the best deal for their clients. The best tenant reps will negotiate lower monthly rents and more favorable terms for their clients.
When you sign a lease, the listing agent will receive a commission of 4 percent to 6 percent of the lease’s value. The listing agent will then split that commission with your tenant rep. This split is often done on a 50/50 basis, though not always.
If you sign a five-year lease for 2,000 square feet at $30 a square foot per year, a commission of 5 percent would equal $15,000. If the listing agent agreed to a commission split of 50 percent with the tenant rep, your tenant rep would receive $7,500.