The Other Costs
If you’re like me you don’t like surprises when it comes to the associated costs of a big purchase. And while a lease isn’t a purchase it’s a financial obligation for a certain amount of time. And if you are a business owner or manager with a P&L you want to know upfront your associated costs so that you can: a) make sure it works for your company b) budget for them and c) know your future financial responsibility
So with that in mind and given the amount of times I get asked by tenants “What are the other costs associated with a lease that I should be thinking about?” Here they are below:
It’s not included in your rent. There are three ways you will be paying:
1. Flat rate per square foot. It’s the most expensive. Assume $3.50 per square foot. Example. 15,000 square feet @ $3.50 per square foot = $52,500 per year / 12 months = $4,375 per month
2. Submetered. Some percentage above the amount that is above your proportionate share of your electricity usage.
3. Direct meter. You pay directly to the utility company what you have used.
b. Annual Rent Escalations.
Either a fixed percentage or your proportionate share of the annual increase in operating expenses. Every year after month 12 your rent will go up a certain %.
Landlords try to achieve 3% annual fixed percentage escalations that compound. Representation will help you negotiate less. But for the exercise on $70 per square foot space by year 5 you are at $78 approximately because each year your rent is increasing $2.10 per square foot.
Your proportionate share of the increase of the buildings annual expenses. If you have 25,000 square feet of a 250,000 square foot building you are responsible for 10% of the annual increases from 12 months after you start your lease. Budget out 1–1.5% increases but this can only be a best guess because of the unforeseen occurrences in a building and associated costs of maintenance.
c. Real estate taxes.
It’s complicated and based upon the income of the building you choose. But know it increases every year and should be part of your equation. Best to ask when you have identified a space you like.
d. IT, Wiring and Furniture.
Space won’t come wired or furnished unless it’s a sublease. So direct space for furniture assume $15 per square foot (the range can be $10–45 depending on your preferences) And then wiring & IT which will also highly depend on your needs
Standard building hours are 8–6. Some longer. A few even offer weekends. Some businesses like attorneys work late hours. So if you need additional air think about if you might need supplemental (extra) or if the building has operable windows. There are often costs associated with supplemental like tapping into the buildings water. Better to ask up front.
f. Representation Fees. Zero. The landlord pays.
Have someone who does leases for a living negotiate your lease. Remember leases are written by landlords for landlords not for tenants. You need an attorney who negotiates office leases for a living review your lease. You need to be protected for all the things that most likely won’t happen but could. It’s protection for your business and an extremely worth while investment.
The landlord will need you to have commercial liability insurance. Every building has its own required amounts. It will be stated in the lease.
Class A buildings will include this. In Class B&C buildings it depends. Best to ask.
There’s more to say on all of these topics but this is a primer as you begin the process.