Three Tricky Things in an Office Lease

by | 01 December 2014

Every office tenant wants the highest quality office space available that fits within his or her budget. In other words, they want the best value that fits within their total overhead cost structure. The ability to achieve this objective requires an understanding of what drives costs and how to effectively manage them.

There are three factors that impact the total cost of your office space:

  • The location you choose
  • The lease structure and negotiations
  • The layout of your space

Understanding these factors and the close interplay among each is critical in getting the most value out of your office space. If tenants fail in this regard, it is typically because they did not properly address one of these factors.

There are myriad items in a typical office lease that will add to the cost of your occupancy if they are not addressed properly. Minimizing the cost of office space and the probability of negotiating a favorable lease will be greatly increased by utilizing professional expertise throughout the leasing process.

I need your help …. Can you explain this?

I periodically get phone calls from office tenants who choose not to utilize professional representation, asking for help because they clearly don’t understand the lease they signed or are about to sign. While there are dozens of key issues in any typical office lease, three of the most commonly misunderstood components in regards to lease structure are, first, how the landlord charges rent for the common areas of the building, second, how the building operating expenses are structured into the rent and, third, how the cost of improving your space impacts the rental rate.

Understanding the common area factor

Few commercial real estate concepts are as misunderstood by tenants and even real estate professionals as the measurement of office space square footage for rent purposes. The formula to determine the amount of rent in most office leases incorporates both the usable square footage plus the tenant’s proportionate share of common areas.

Rent is more than just rent

Lease agreements for a typical office building are complex contracts. Most commercial leases provide a mechanism for common area maintenance and other building operating expenses (such as janitorial services, taxes and insurance) to be passed on to the tenant. In office building leases, where separate utility metering is uncommon, utilities are also included in the pass-through of expenses. These pass-throughs are often referred to as “additional rent.”

Negotiating the tenant improvement allowance

A key component of any lease negotiation is the tenant improvement allowance provided by the landlord to build out or retrofit an office space for the tenant’s specific use. The amount of the tenant improvement allowance, in addition to the length of the lease term, has a significant impact on the negotiated rental rate.

Coy Davidson is Senior Vice President of Colliers International in Houston. He publishes The Tenant Advisor blog.