Office tenants may be wrapped up in lease rates when it comes time to renewing or relocating their offices. It may sound ridiculous to overemphasize the fiscal impact of square footage rates over a three or five year lease period, but tenants routinely do. They perceive the rental rate as the end-all without considering what other elements might be involved in the cost to occupy space, and there are always other elements. Here are six elements of occupancy costs to look out for when reviewing a lease.
Building Operating Expenses
The cost to landlords is big dollars to operate and maintain their buildings. There are scores of recurring costs that factor into their profit models other than rent. Any of these costs can be handed down in some part to tenants. These are called “pass through” expenses, and these can include taxes, insurance, landscaping, snow removal, security and utilities, among many others. Landlords limit their monetary liability by employing “expense stops.” This is when the landlord agrees to pay an operating cost up to a specified threshold where it then “passes through” all additional costs on to the tenant.
Tenants may not be familiar with how their space is defined and measured. The term, “Usable square footage,” is the amount of space on which the tenant can set its furniture and equipment, and where people work each day. “Rentable square footage” is the usable square footage plus the tenant’s pro rate share of common elements of the building, like lobbies, hallways and restrooms. Rentable square footage is specifically what tenants pay for each month. Tenants should always know who is doing the measuring and what standard they are using. In fact, tenants would be wise to hire their own interior architect or another qualified expert to verify the landlord’s documented square footage.
Tenant’s space requirements and needs can change dramatically during a lease period. Sometimes subleasing becomes a financially attractive option, if the landlord will allow it. Can the tenant move out altogether and sublet its entire space, or will it be in default of the lease? Can it sublease just some of the space to another tenant? What would the rates be? All these questions can be reviewed and resolved by our team.
Right of Relocation
Any lease may stipulate that the landlord can relocate a tenant to another space within the same building. On the surface this may not seem like an major inconvenience on the surface but consider all of the annoyances even a small tenant must endure during a relocation process. The disruption of an unintended move to another space, even within the same building, could be crippling to a tenant, this is not considering any of the associated expenses.
What happens to the tenant if they stays in their space after the lease period expires? In some cases, the landlord will allow for a month-to-month lease period to commence, but at inflated rates. This provision will also state how much notice the landlord will offer the tenant before eviction.
Tenant Finish Allowance
This is usually a dollar per square foot amount used to improve the tenant’s lease space. Tenant improvements can include construction, design and engineering costs, carpet, paint, and hardware. The landlord may already have an allowance built into its budget, regardless of whether the tenant asks for any of it. So, for the tenant, it is a “use it or lose it” proposition. Every tenant should take full advantage of what the current market will bear when it comes to improvement dollars.This also includes renewing tenants.