By Maile Proctor
When you’re looking for a new space for your office or business, there are certain terms and items you should be aware of. If you’re new to commercial real estate, there may be a small learning curve. For example, if you’re comparing rental rates among buildings, it’s common for tenants to calculate their budget based solely on rentable square feet (RSF). However, there are many additional costs that must be factored in before you choose an office that makes sense for your business. If you’re relocating, costs associated with moving can be extremely high on top of first month’s rent. If you’re a new business, the last thing you want is to be stuck in a long-term lease paying more than you can afford. Here are five hidden costs office tenants should be aware of when calculating exactly how much you’ll pay.
Know How the Base Year Rate is Calculated
The first year of your lease is considered your base year, during which your rental rates will not go up. Many landlords use this year going forward as a baseline to compare and calculate your day-to-day operating expenses. If they foresee their operating costs rising for the next year, your rates will increase.
It’s important to know how your landlord calculates one year and if possible, negotiate to have 12 months from the day you sign the lease, instead of the typical calendar year. For example, if you sign the lease in October but the landlord’s base year ends Dec. 31, your rate will go up after three months.
Compare Trends in Operating Costs for Similar Buildings
An increase in operating costs is to be expected for a long-term lease. However, when searching for the perfect office space, do your homework to ensure what you’ll pay in future years is comparable to other spaces around town.
Similar buildings will have about the same percentage increase in operating costs year over year, so if one space is significantly higher, be sure to ask why. It’s understandable for rates to rise due to cosmetic or mechanical upgrades, but if past tenant’s rates doubled every year or your friend on the same block is paying significantly less, it’s worth looking into.
Parking Costs Can Add Up
Especially for major U.S. metropolitan markets such as New York City, Chicago and Los Angeles—parking can be a very costly monthly expense. Depending on where the building is located, you could have access to a limited number of reserved spots, pay a monthly fee for a parking garage or be left to figure out parking on your own.
In some cities, parking spots can cost as much as an additional $200 per month, per car. If you can use public transportation to commute to work, this won’t matter as much. Just be sure to ask questions about parking before you sign your lease—your landlord might even know of neighboring spots you can use.
Understand the Type of Lease You’re Signing
Typically for office buildings, the tenant will sign a full-service gross lease where everything is included. You could, however, encounter a modified gross lease, where the tenant pays a base rent plus one or two additional items, such as electricity or Internet.
It’s important to know which type of lease you’re signing, as it could be the difference in hundreds of dollars per month. For example, be weary of a modified gross leased office building that has a very low RSF price, as you could make up for that in expensive monthly utility bills. In contrast, larger office buildings could save you money in a modified gross lease by spreading expenses or bills among many tenants. Also look out for overtime usage charges, such as air conditioning, electricity etc. after normal working hours.
When your lease is almost up, options to renew are always in favor of the tenant. “The tenant should put in writing his/her desired options for renewing the lease, including the rent that will be paid upon renewal and how much notice the landlord requires,” explains Laurens Nicholson, a specialist in commercial investment properties and principal and director for Windsor Aughtry.
Capital Improvements Counted as Operating Expenses
As a tenant, you should have legal counsel negotiate to exclude certain items from monthly operating costs in your lease. “Capital improvements to the building—either cosmetic or mechanical—that are not required by law, reduce overall operating costs or result in greater efficiencies of the building, should not be included in day-to-day operating expenses for the tenant,” explains Lexology. Protection against such instances are often not included in the lease, therefore the tenant is stuck paying thousands of dollars out of pocket for upgrades that solely benefit the landlord by adding long-term value to the property.
There can also be additional costs for moving out when your lease is up, such as built-in clauses about pre-existing conditions. As a best-practice before signing any type of lease, be sure to do your homework on past and future projections for unforeseen costs. Don’t sign anything you don’t understand; if you’re unsure about any terms or clauses, seek legal counsel or find a tenant representative. Once the negotiations are done and the papers are signed, you can focus on moving into your new space and running a successful business.
Maile Proctor is a full-time blogger and content editor. She writes articles on lifestyle and family, health and fitness, business, education, how to and more. Maile earned her Bachelor’s in Broadcast Journalism from Chapman University.