Navigating an office lease can be a tricky task for just about anyone, and there are many terms that can impact your budget if you don’t fully understand them. Not all language will affect your bottom line directly, but if you don’t familiarize yourself with these six terms, expect to take a financial hit.
If your lease expires before you give notice to your landlord, it is permissible per the holdover provision of your lease for the landlord to charge you anywhere from 125% to 200% in additional rent. You might think this is outrageous, but keep in mind that your lease probably had a notice period giving you anywhere between 6 to 12 months prior to expiration to notify the landlord of your plans. Had you given notice, your landlord would have had adequate time to properly market your space. Without that heads-up, your landlord is subject to lost revenue; the only way of making that up is to charge you extra rent.
Useable Square Feet (USF) vs Rentable Square Feet (RSF)
Here is the quickest explanation of the two: useable SF is the actual square footage that you are using within your four walls. The rentable SF adds your proportionate share of the common space like the lobby, corridors, common restrooms, and so on. If you enter into a lease thinking you’re only paying on the USF when in fact you’re paying on the RSF, then your rent is going to be 15% – 20% higher than what you had expected.
Base Year Escalations
This is a tough one for a lot of people to understand. Say, for example, you’re paying a gross rent of $22/SF, made from a combination of $12/SF base rent and $10/SF for operating expenses. If your lease is signed in 2016, your base year is whatever the operating expenses were in 2016—so, $10/SF. If your operating expenses increase in subsequent years, you will pay the difference between $10/SF and the increase in those years. Let’s say expenses go from $10/SF to $11/SF between 2016 and 2017. You’ll owe the $1/SF difference going forward. It’s impossible to predict what the increases will be; industry standard is 2-3% for accounting purposes. Before you sign the lease, request a three-year history of the building expenses to better gauge how they have fluctuated year over year.
Utilities vs Tenant Electric
Utilities include your heating, air and electric whereas tenant electric only includes your lights and plugs. The costs associated with the two vary depending on the building, age of units and several other factors. In my market, we usually quote $3/SF for utilities and $1.75/SF for tenant electric. That’s an extra $1.25/SF if you sign the lease thinking you’re only paying for electric when, in fact, you’re paying for all utilities.
Most landlords include janitorial services in the rent; however, there are some that do not. Cost for cleaning your suite will depend on how often you want it cleaned. For an industry standard, if you had the suite cleaned 5 times per week, assume an additional $1/SF in your rent.
It really depends on whether or not you sign a gross lease or a net lease. Typically in a net lease, tenants are responsible for the maintenance of their HVAC units. Some leases, depending on how they are written, will also make the tenant responsible for replacing the unit. Before you enter into a lease, fully understand whether it’s a net lease or a gross lease. If it’s a net lease, make sure the unit is in good working order and find out when it was most recently replaced.
Add all of these up and you could be paying significantly more towards your real estate than you first accounted for. It seems that most tenants focus their negotiating tactics on the actual rent per square foot. These other areas of the lease can be negotiated to help mitigate loss and minimize out-of-pocket expenses. Real estate brokers fully understand these costs and how they are quoted in your particular market, so make sure you align yourself with a trusted advisor.
The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report.