Next to preparing annual income taxes, reading and understanding the terms of an office space lease listing can be one of the most complicated things a business will have to do. Listings for office space often use real estate terms that only commercial real estate brokers understand.
While it’s always a good idea to have professional assistance when looking for office space to rent, many business owners start by doing their own market research.
With that in mind, here’s an explanation of some common leasing terms that will make it easier to read a listing for office space for lease.
How Is Office Space Rent Quoted?
Listings for office space will quote the asking rent in one of three different ways:
- Flat rate per month
- Price per square foot per month
- Price per square foot per year
Let’s say the office space listed for lease has 5,000 square feet of space. The landlord or listing broker might quote the space for rent at $7,500 per month.
Here’s the calculation to determine the price per square foot per year:
$7,500 x 12 months = $90,000
$90,000/ 5,000 = $18 per square foot per year.
The asking rent per square foot per month is: $18 / 12 months = $1.50 per square foot per month.
How Is Square Footage Determined?
In just a bit we’ll discuss some of the other office space leasing terms that affect the total rent a business will pay to lease office space. But first, office tenants should make sure that they’re really getting what they think they are paying for.
Office listings will quote the square footage of the space in either usable or total square footage. Usable is just like it sounds – it’s the actual space a business will use for reception areas, conference rooms, an employee break room, and work areas.
But some landlords will measure the size of the office space they’re marketing for lease by including all or part of the exterior or dividing walls. If a wall is six inches thick, that’s three inches all around that a tenant is paying for but isn’t able to use.
While three inches may not sound like a lot, adding up those few inches can decrease the usable square footage by nearly 10%, which means the total 5,000 square foot space only has 4,500 square feet of usable office space.
By taking the annual rent of $90,000 and dividing by 4,500 usable square feet, we find that the actual rent per square foot has gone up to $20 per square foot – an increase of just over 11%.
What Are the Different Types of Office Space Leases?
Leases for office space fall into three general categories:
- Gross or Full Service – where everything, sometimes even the utilities, are included in the monthly rent payment
- Modified Gross – where some things – but not others, so be sure to ask – are included in the monthly rent
- Net Lease, NNN Lease, or Net-Net-Net Lease – where nothing extra is included in the monthly rent, and those extras are paid for by the tenant
It’s important for a business to understand the type of office lease being offered in the office listing and what extra costs they will incur by leasing the space under certain terms. Those added expenses can really add up – especially with an office lease length of 5, 10, 15 years or more.
What Are Some of the Extra Charges in an Office Listing?
Landlords try to pass as much of a building’s operating expenses through to the tenants as possible in order to increase the profitability of their investment. Terms to look for in an office space listing that will increase the rent a tenant pays include CAM or common area maintenance.
For example, let’s say that the 5,000 square feet of office space listed for lease is part of a 50,000 square foot building. The landlord’s annual operating costs for the property – including landscaping, utilities, repairs, property taxes, and insurance – are $300,000 per year.
The 5,000 square foot space for rent represents 10% of the building’s total square footage. It also represents a potential additional rent of $30,000 per year if the tenant has a NNN lease or any other type of lease where some of the annual expenses are passed through. The total annual rent is now $90,000 + $30,000 = $120,000 and the price per square foot is now between $24 and $26.67 depending on how much space is really usable.
How Is Free Rent Calculated?
Oftentimes office space listings will have terms such as free rent, move-in incentive, TI or tenant improvement credit, and rent abatement. Whether or not the rent is really free and something is really a credit depends on how the lease is structured.
Some landlords will offer one month of free rent (or rent abatement) for each year of the lease. Then, however, they’ll extend the term of the lease from, say, a 60-month lease with no free rent to a 66-month lease that includes the free rent abatement.
Other landlords will pay out-of-pocket for tenant improvements or give the tenant a cash incentive to cover the cost of making their office space move-in ready. But then they’ll add the money spent on TIs back into the total rent due over the term of the lease.