If you are the owner of a small or large
business, you have probably experienced
the challenges and frustrations of negotiating
a commercial lease. Unlike renting an
apartment, leases for commercial space are
not always simple and clear. The world of
commercial leasing has its own jargon,
procedures and norms to describe the costs
a business owner will pay to occupy space.
If you are considering leasing commercial
space it is important that you understand
the terminology used when landlords
or brokers are quoting lease rates and
other costs beyond the base rent. A clear
understanding will help you make meaningful
price comparisons and to arrive at
smart real estate decisions for your firm.
Today, we'll look at terminology and
costs typical in leasing office space.
Q: When I call to ask the price for a
leased property and the broker or owner
states that it is a "full-service" rate, what
does this mean?
A: A full-service rate means that your
price includes all expenses associated with
the leased space and the total property.
Typically these expenses include real property
taxes, insurance, common area maintenance,
janitorial services and utilities. This
type of lease rate is very typical in office
buildings that are two stories or more.
Q: What does the "expense-stop" clause
mean in my office lease?
A: Landlords are able to estimate their
costs to operate an office, but cannot
always predict increases in certain expense
items. Therefore, it is common to see an
"expense-stop" clause, which requires the
tenant to pay for the escalations in operating
costs over a specified ceiling. Expense
stops may apply to all operating expenses
or be limited to certain costs. For example,
few people saw the recent utility challenge
coming in the California market. A savvy
office landlord would have included a
clause in the lease requiring tenants to pay
for increases in utility expenses if they
exceeded a set per-square-foot figure,
established in a base year.
Q: Why is there a difference between
rentable square feet and usable square feet?
Don't I get to use all the space I pay for?
A: This is a good question and an
important point to analyze when comparing
buildings and leases. The rentable
area is the entire building minus major
vertical penetrations (such as elevator
shafts, vents and stairways). In a lease it
refers to the square footage that the tenant
will be paying for including their pro-rate
share of common areas such as lobbies, fire
corridors and restrooms. The useable area
includes the total rentable area minus all
the floor and building common areas.
The rentable area divided by the useable
area translates into the "load-factor" or "addon
factor." For example, if the load factor in
an office building is 10 percent, a tenant will
pay rent on 1,000 rentable square feet but
only occupy 900 usable square feet. A building
with additional services such as a fitness
center, common area lobbies or mailroom will
increase the load factor and, therefore mean
an increase in monthly lease fees. But, it can
also offer additional amenities benefiting your
employees and customers and improve the
aesthetic quality of the building.
Before you make a final decision on
your next commercial office lease, make
sure you ask the building owner or broker
if he is quoting a full-service lease, what
your expense stop is, and what percentage
of load-factor percentage the lease
includes. Knowing this information
ahead of time will allow you to make an
accurate comparison of costs and smarter
long-term decisions for your business.
Par Tolles is managing director of
Trammell Crow Co. in Reno.
