Understanding the True Cost of Leasing Commercial Space: A Guide for First-Time Tenants
Leasing commercial space can be overwhelming for a first-time tenant, and one of the easiest mistakes for tenants leasing without a tenant representative is not knowing the full cost of a lease.
Commercial property is traditionally listed on a per square foot basis. The cost per square foot (PSF) will differ based on the area you are looking, the type of space, the condition of the building, and current market conditions. Generally, in the Northern Virginia market where TARTAN operates, industrial leases are usually the lowest PSF, followed by office, and retail is more expensive, depending on the location.
To calculate your rent, multiply the PSF by the total SF of the space you are looking at. For example, a 1,000 SF space listed for $25/sf, will come out at $25,000 per year, and $2,083 per month. To get a range of PSF to look in, decide what you can afford to pay annually, and divide by your size requirement. A broker will also be able to help set your expectations and target spaces in your desired price range.
This is not the final cost of your space. Depending on the space, there are a number of other costs that will not be listed on a standard property listing. To start, let’s discuss the different types of leases:
FS: Full service. This means that the PSF you see will be your “all included” rent amount. Usually, full service means that the landlord will pay the real estate taxes, the utilities, nightly cleaning, and any general maintenance the property requires. This type of lease is most common in traditional offices.
NNN: Also known as a Triple Net Lease, this lease is the opposite end of the spectrum from a full-service lease. In a NNN lease, you pay your “base rent” that is specified in the lease, as well as pay your share of the real estate taxes, your share of the utilities, and any maintenance. NNN leases may also mean you will pay for cleaning, trash collection, and any other costs. Sometimes you reimburse the landlord and in other cases you pay directly to a provider. You need to ask these questions upfront so there are no surprises. Triple net leases are traditionally used in this market for warehouse and retail leases.
In between FS and NNN there are a number of other leases where you will be required to pay other costs. Let’s go over all additional costs that might be included in your rent:
Buildout costs: this is the first charge you will encounter when leasing new space. If you have a specialized business that needs a non-standard built-out, this will be more expensive. Some landlords will happily upgrade the carpeting and repaint the space between tenants at no cost to you, some will provide a Tenant Improvement (TI) allowance as an incentive to get you into the space, and some will be entirely hands-off, letting you front all of the costs. An important note about TI allowance; most landlords will have a cap on TI allowances, meaning if you want an expensive build out, they will provide a portion of the funds, and let you handle the rest. So, if you want a modern office with lots of glass and exposed ceilings, be prepared to front some of the costs, even with a TI allowance.
Utilities: Once you move into your space, this will be the main portion of your expenses. Consider the costs of water, sewer, gas, and electric in the costs of your space. When working with a broker, they will be able to give you estimates on these costs, or have access to historic data for that space that will give you a more accurate estimate. A safe bet is to add a few dollars onto the PSF to estimate rent plus utilities.
Real estate tax: The way the landlord will handle the real estate taxes for a property will differ depending on the lease agreement. In a NNN lease, you will reimburse the landlord for the RE tax, and if you are sharing the property will other tenants, this will be calculated on a percentage basis. Another common agreement that will be part of a full service lease the tenant will pay any increases in the RE tax over the base year they moved into the building. Meaning that if the RE tax when you sign the lease is $10,000/year, and increases next year to $10,200, you are expected to reimburse the landlord for that $200 increase.
Maintenance: This refers to any work the property needs over the course of your lease. This could be as simple as repainting or getting a plumber to fix that leaky sink, up to replacing the roof or repaving the parking lot. Your broker will have insight on what maintenance the property you are looking at may need, and how much you can expect to pay. In a full-service lease, you will contact the landlord and they will have the work done, while in a NNN lease, you will be expected to cover the entire maintenance process. This is where things can get tricky and you need to be crystal clear in the lease on who is responsible for what.
All occupancy expenses need to be taken into account when you are comparing spaces you are looking to lease. When you are looking at spaces with varying lease formats such as triple net vs. full service you have to make sure this a true comparison.
This is where having a tenant representative will help exponentially in this process. An experienced broker will be able to make the lease comparisons and advise you on what to pay on a PSF basis, and negotiate the landlord over these extra costs. They will make sure that you are never surprised.
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