In its most basic element, finding office space is a simple process. On one side you have supply (landlords and building owners) and on the other side you have demand (tenants looking for space). Where these two intersect you have a documented agreement in the form of a lease. This should be a straightforward transaction that mirrors the process of renting out an apartment; however, signing a long-term lease for office space can get confusing — and expensive — very quickly.
Commercial real estate (CRE) has not kept up with the times. The industry is riddled with archaic terminology, lack of standardization and limited regulation. All of this leads to an extremely inefficient leasing process, which in most cases results in the tenant paying extra money. Here are the top three things you may not know about your long-term office lease.
All Square Footage Is Not Created Equal
CRE pros love using the phrase “square footage” and its many derivatives to talk about commercial property. In basic terms, the square footage of a building describes the physical size and boundaries of a space. Because this is the common denominator of all office space throughout the country, you would think it is measured using a standard system. But that couldn’t be further from the truth.
Every market measures buildings differently, meaning you might be paying for space you literally cannot use. For example, in some markets your usable square footage might be measured to the inside of an exterior wall cavity. If your lease stipulates that you pay rent on a price per square foot (PSF) basis, that extra space inside the exterior wall cavity could be adding a couple hundred dollars more to your rent payment every month — even though you get no benefit from it. Makes you start to question why square footage is the common denominator in all of commercial real estate, right?
You Can Amortize Tenant Improvement Packages Into Your Rent
A tenant improvement (TI) package can be defined as money (in the form of improvements to an office space) that a landlord “gives” to a new tenant upon execution of a long-term lease. These TI packages are great marketing tools for landlords to entice tenants to choose their building over a competitor’s, and landlords will make sure you know this. But when you dig deeper, who actually pays for the tenant improvements? You guessed it: the tenant.
As the tenant, whether you’re a large or small business, it’s nice that you don’t have to come up with the initial cash to fix up your space. However, in the long run, a landlord still passes on the cost of the improvements to the tenant by building them into the rent schedule. Most landlords amortize TI costs into the rent schedule at an interest rate of 10 percent or higher, and they typically do so over a short period of time. These costs add up very quickly and may leave you wondering why your budgeted rent of $500 per employee actually comes out to $600 when all is said and done.
Common Area Maintenance Expenses May Contain Hidden Fees
Common Area Maintenance, or CAM, is an expense category that landlords use to throw in a variety of miscellaneous charges. As a tenant, you are responsible for a pro-rata share of this expense, which is based on how many square feet you lease in the building. CAM is a usual expense you should expect to pay when signing a long-term lease, but you need to be careful. Sometimes CAM includes an asset management or property management fee. These are expenses a landlord has to pay but then passes on to the tenant. But does that really make sense? Wouldn’t it be nice to know exactly what your monthly rental payment is getting you?
Commercial real estate, specifically finding office space for your business, doesn’t have to be this confusing. If you have fewer than 25 employees, you should consider a simpler real estate solution — such as desks on demand or a month-to-month agreement.
It is these exact issues and the painful process of commercial leasing that led my business partner Jeff Jacobson and I to create Kinglet, an online marketplace connecting small businesses and entrepreneurs with affordable office space. The process Kinglet provides is a stark difference from traditional leases: It is simple, flexible and — most importantly — painless.
No matter what you decide, be careful and educated about what you’re getting yourself into before signing a lease.