5 Cost Factors No Leasing Decision Should Ever Be Made Without

On the hunt for a new business location? What an exciting time! An office move or expansion can ignite positive momentum for a company, its employees, and its clients — mainly because it is associated with sustainable growth. A new address can help you extend your geographic reach, hire additional talent, or demonstrate hard-earned success. But no two properties are exactly alike. So the search for your company’s new long-term home will no doubt be riddled with challenging calculations and endless what-if scenarios.

A common mistake business owners make during this process is to compare top property contenders based solely on their cost per square foot. This approach can be deceiving. For example, the location of entrances, stairwells, and other common areas within an office may drastically decrease the amount of usable space. Or, a unique lease agreement may offer a competitively lower monthly payment because there are additional expenses a tenant will be responsible for separately in an annual payment.

The following factors should all be taken into account when considering a new lease. Knowing this level of detail about a property not only helps you make a more appropriate comparison but ensures the property you end up choosing is the right one for your business — now and in the future.

1. Know how much space you really need.

You can’t start looking for office space until you understand the parameters of what your business needs. This is best accomplished through formal space planning with an architect. However, preliminarily, an experienced general contractor can review your current space against to anticipated needs, and then define size requirements for initial site selections.

During the space planning phase, consider your anticipated growth during a lease term, understand all electrical and IT needs, and always remember to reserve square footage for storage.

2. Calculate total cost of occupancy.

Know all of the costs that go into a building, and which ones you will be responsible for, such as Common Area Maintenance fees, common area utilities, property management, the building owner’s property taxes and insurance, and the cost of your janitorial services, utilities, taxes, insurance.

No total cost of occupancy calculation is complete without taking note of unplanned expenses, such as building repairs and maintenance. Repair responsibilities can vary by building type. For example, retail tenants are typically responsible for their own HVAC maintenance, wherein a commercial building, the building owner takes care of it.

3. Compare lease terms.

Commercial lease agreements do not come standard, but there are different types of leases you should be aware of because they will impact your total cost of occupancy calculation.

  • In a gross lease, the tenant pays a flat monthly amount and the landlord pays for all building operating costs.
  • A net or N lease agreement, the tenant pays the base rental amount plus some of the expenses, which are based on actual costs to the building owner.
  • In a net-net or NN lease, the tenant pays the base rent, some of the expenses, and the owner’s real estate taxes and insurance premiums are divided among tenant spaces.
  • A net-net-net or NNN lease agreement means the tenant pays base rent, plus the building owner’s operating costs, including taxes, insurance, maintenance, and repairs, divided among tenant spaces.

4. Understand how shared costs are divided

Expenses are typically divided based on a pro rata share. So if a building is 100,000 square feet and you rent 25,000 square feet, your pro rata share is 25 percent. Clarify if expenses are actual costs or estimated costs. Know why and how these costs will change from year to year.

5. Determine efficiency of space

Visit every site with your space plan in hand, since that will dictate how you can use a space most efficiently based on its layout and occupancy limits, and your workflow and furniture needs. For example, let’s say your vision for the new digs includes a large multi-use room for creative thinking, training workshops, or client gatherings. During site selection, you’ll not only need to ensure the square footage is there in the space layout by clarifying rentable square footage and usable square footage, but that it is easy to access and within a reasonable distance from workstations.

We started this article by warning you to avoid mistakes in calculating costs. Now that you have a handle on the potential costs, our final piece of advice is to never let cost be the only deciding factor in your decision. The location is important for brand exposure, public access, and employee recruitment. The quality of property management will determine how much repairs or maintenance will consume your time. Do your due diligence to ensure your next move contributes to long-term business vitality.