Office Leases Have More Expenses Than Base Rent
Often I hear my clients ask landlords for the rental rate. The landlord will offer a certain dollar amount per foot. Sometimes they will quote an estimated monthly amount.
The unsophisticated tenant takes this quote and estimates its monthly rental expense. This person is in for a surprise because the office lease will have many additional expenses that the tenant may be responsible to pay.
At first glance, these frivolous charges may appear to be small. Especially when compared with the rental rate quoted by the landlord. However, over time they begin to add significant expense to the financial burden of the lease. I thought I would write to give you some ideas of areas to either avoid hidden costs or at a minimum be aware of them.
Our Hidden Cost Office Space List
Office Space Size: Often a tenant may take on more square footage than they need. Obviously, the biggest expense to a tenant is the size of their office. If a lease is 10,000 square feet and 1,500 square feet isn't utilized there could be a 15% reduction in leasing expense. Don't lease more square feet than you need. Negotiate a right of first refusal in your lease or the ability to relocate if you outgrow your office space. Don't lease more square footage than you need.
Operating Expenses: Operating expenses are usually charged one of two ways. They are in the form of a Base Year or Tripple Net Charges. It is important to understand each method so you know your expense for the lease.
In either case, a tenant will generally be billed for a percentage of the building that they occupy. The landlord will prorate their share and place this percentage into the lease. It is important that the correct square footage is used by the landlord for this calculation. It is accepted by the industry to us BOMA measurement standards.
A base year pass through requires the landlord to pay for all property taxes, insurance and operating expenses associated with the building and include this expense in the first year's rent. This expense is used as the number that is applied for future operating expense increases. It is important that this number is calculated as if the building is 95% occupied or the tenant may be overcharged in the future.
Triple Net (NNN) is a straight pass through to the tenant will pay a percentage of the building's property taxes, insurance and operating expenses dollar for dollar. When leasing a space a landlord will estimate what their NNN expenses are however if they are wrong and underestimate the tenant will be charged. So try your best, to get an accurate estimate. Compare estimates with other office buildings to see if the quoted number is to low.
Electricity: In addition to the base rent many building will charge their tenants a prorated share of the building's electricity expense. Be careful of your neighbors. If you have another tenant that is a high electricity consumer you will be paying for their some extra usage.
Parking: Parking garages are not inexpensive to build. The landlord must recover this expense. They are either charging enough in base rent to cover this expense or they will require parking charges per vehicle. It isn't uncommon to have some of these expenses a baited but you need to have the market information to negotiate this reduction.
Pre-Existing Condition: If a tenant moves into an office space and they make alterations or add network cabling there could be a charge when they move out. The landlord may have the right to require the tenant to return their office space back to its original condition. This can be an expensive surprise. Make sure any alterations you make to your space is approved by the landlord and that they wave this right for any approved alterations or networking.
Rental Rate Escalations: I want to mention this because most landlords upon a first meeting will quote a rental rate and fail to mention that they will require annual rental increase. When you are getting verbal rental rate quote make sure to ask if the rate is constant for the office lease term.
These are a few good ideas that an office tenant should be aware of when they are looking for office space. If you have any questions or if you would like me to elaborate upon any of these ideas please feel free to contact me. I have been providing Dallas Tenant Representation services for over twenty years and know the office markets in Dallas, Plano, Frisco, Richardson Allen, and McKinney. I can help you find and negotiate a great office lease.