The starting point for determining your operating costs under an office lease is identifying what services the landlord provides, what services the tenant must get directly, and who bears the cost. The following are common costs for office space:
Any analysis of a given space’s desirability typically begins with the fixed rent that the landlord quotes to you. But this starting point must be evaluated in light of other factors.
For example, landlords may quote a monthly lease rate of $2 per square foot, typically meaning rentable square footage. The actual usable square footage of the premises is the space that you actually can use for your business operations. If you are unsure about how to determine your space needs, check out How Much Office Space Does My Small Business Need?
Rent escalations. Fixed rent over longer-term leases is relatively rare. Sometimes, landlords insist on annual increases based on the percentage increases in the Consumer Price Index (CPI). If your landlord insists on rent escalations, try to arrange that a CPI rent increase does not kick in for at least two years. Then, try to get a cap on the amount of each year’s increase. If you have to live with a rent escalation clause, consider a predetermined fixed amount. Common area maintenance, HVAC, and operating costs. Take into account operating costs that the landlord may pass on to a business. If the landlord is charging separately for these services, try to negotiate a fixed fee or cap on the amount.
The structure of the lease payments may also be important. For example, a startup business without much capital may want two or three months of free rent at the beginning of the lease, with a lower rental for the first year and increasing rentals for the second and third years.
When analyzing the cost of space, you must also take into account other operating costs that the landlord may pass on to you, the tenant. Some leases require the tenant to pay for all cleaning, building security, air-conditioning, maintenance, and so on; this is a so-called Triple Net Lease.
Right of first offer or first refusal for additional space. A right of first offer obligates your landlord to present any space that becomes available in the building to you first before marketing it to third parties. A right of first refusal on space obligates the landlord to bring you any deals he is willing to sign with third parties for space in the building and allow you to match the deal and preempt the third party. See Option to Expand Under Office Leases for more information.
Keep in mind that different buildings have different costs and landlords may charge for services in a different manner. So the types and amounts of the costs that the landlord passes on to the tenant can have a big impact on the economics of a lease
What you just learned about city office space rent is just the beginning. To get the full story and all the details, check us out at office space rental