- A Guide To Office Leasing
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A Guide To Office LeasingMarch 28, 2016
What are the fundamentals of office leasing from site selection to closing and beyond? Any tenant needs to be aware of financial, operational and risk areas of a commercial lease.
The tenant needs to be able to understand lease terms, loss factors, escalations, electricity, tenant renewal options, default provisions, insurance and liability, landlord concessions, security deposits, work-letters, subletting and negotiation.
What does a tenant need to know as they navigate identifying and leasing of office space?
- What length of term does the landlord looking for? A traditional lease runs from five to ten years. Terms shorter than that make it difficult for a landlord to recoup the costs of the initial leasing agreement which includes legal and brokerage fees and very often buildout costs. Those costs are amortized into a lease and it is often the case that a landlord isn’t in “the black” for the first few years of a lease.
- Can I get out of lease once I have signed it? A lease protects both sides. Just as a landlord can’t say “Rents have gone sky-high and you need to move so I can achieve a higher rent,” a tenant can’t say “Sorry Mr. Landlord but my business isn’t doing as well as I thought it would and I need to walk away now.” A signed lease from an excellent tenant is an asset against the building that a landlord can use as collateral in the event they seek to get a loan. There are various mechanisms such as a “Good Guy Clause” that offer some measure of protection to a tenant but by and large, a signed lease is a binding legal document that is actionable in a court of law.
- What is included in a base lease? Buildout? Heat/AC? Taxes? Every lease is different although most share some commonalities. It is common for a tenant to receive a custom buildout. It is usually capped to a specific per square foot dollar amount, generally in the $25-$35 per square foot range. Any tenant improvements that go above that capped amount would be at tenant’s sole expense. Heat and air conditioning are generally included in the base rent although the hours of operation will often be restricted. Most buildings supply heating and cooling during normal business hours and at least part of Saturdays. The reasons for this are that the entire building system needs to be activated in order to provide heat to one or two tenants or to the whole building. This is traditionally addressed in the lease where a stiff “overtime” charge will be applied to tenants needing heating and cooling outside of the business hours of the building.
Taxes are generally included for the base year of the lease. For example, if a tenant signed a lease in January of 2016, the taxes for that year would be included in the rent. Once the taxes go up (which they always do), the tenant will be responsible for the proportionate share of the increase. g. If a tenant’s suite comprises 2.7% of the entire building, a tenant would be responsible for 2.7% of any INCREASE over the base year taxes.
- What other costs are usually in a lease? Escalations? Common area charges? Virtually all leases have an “escalator” that raises the rent at defined intervals. Most common would be a 3% annual increase that compounds over the full term of the lease. In almost all cases this escalation covers any operating cost increases that the building may need to absorb which would also include any common area charges.
- What is a loss factor and why do they vary so widely? This issue is one of the biggest hurdles tenants have to overcome. An office building has many common areas. The main lobby, hallways on each floor, shared bathrooms, etc. From the building owner’s perspective, a tenant should rightfully pay their share for the use of those common spaces. In practice this equates to a tenant paying for square footage that isn’t for their exclusive use. Loss factors are always quoted as percentages. Most common is a range of 25-40%. For example, leasing a 1,000 RENTABLE square foot space would not actually equate to a true 1,000 square feet inside of the four walls. The actual USEABLE square footage would be a calculation based on the building’s assigned loss factor. The loss factors can differ greatly depending on the amount of common space throughout the building. It can also be impacted by the number of tenants on a floor-the more tenants per floor, the higher the loss factor.
Ingram & Hebron Realty deals with all of these issues on a daily basis. We have assisted hundreds of tenants in the leasing of millions of square feet of office space. It would be a rare situation that we haven’t successfully dealt with.
See part 2 here: http://ingram-hebron.com/2016/06/22/a-guide-to-office-leasing-2/