What are the Top Occupancy Costs in an Office Lease?

In this article, you'll learn:

• Key rent components, including base rent, escalation, and abatement.
• How renovation costs and tenant improvement allowances affect your budget.
• The impact of operating expenses and security costs on your lease.
• Why working with a Tenant Rep™ is crucial for minimizing occupancy costs.

Do you know what you’re on the hook for when it comes to your commercial lease? Or do you just know the number that your landlord gave you?

It’s key to break down what occupancy costs a typical commercial tenant will experience. Not only will understanding them enable you to drive stronger negotiations, but it will keep you safe from getting stuck paying for what you don’t have to!

In this article, we will discuss some of the top occupancy costs to expect in a commercial lease.

Rent

Rent is going to be your most variable occupancy cost. Not so coincidentally, it also represents your best chance to negotiate for lower rates. Your rent can be broken into several portions, starting with your base rent. This is dependent on many factors, including:

• The market supply vs. demand when signing  
• The building’s initial condition  
• The geography  
• Negotiations with landlord 
• The length of your term
• Whether or not you use a True Tenant Rep™

As such, there’s a lot of room to move numbers around. This is especially true if you are a credit-worthy tenant looking to sign a long-term commercial lease. Since The Office Apocalypse, demand for space has reached record lows. If tenants are looking to sign new leases, they are:

1. More likely are for smaller footprints since companies are shedding weight where necessary. (In personnel and square footage)
2. Less likely to sign long-term leases since the future of commercial space is so up in the air, compounded by an oncoming recession

As a result, property owners have suffered. But, for tenants, there is a new chance for you to drive more favorable deals and lower rent rates than ever. However, it is critical to understand that landlords are savvy. They know that if they lose money when quoting a lower base rent, they can make it back elsewhere. That is why it is so important to look at your lease as a whole rather than individual parts in a void. 

Rent Escalation

Because another critical element of your rent is the escalation clause. Escalations can eventually become the single most determinate factor of your total cost of your rent. Rent escalations are compounding and therefore increase on a previously increased number. Rent increases can appear as:   

• Rent Bumps
• Percentage Increases 
• Hybrid- Percentage and Hybrid  
• CPI Escalations

Now rent escalations are an entirely separate discussion, that you can read about The Perils of a Bad Lease Escalation Clause. There’s a lot of nuance surrounding lease escalation types and before negotiating your lease, it’s best to be prepared.

But for the short of it, stay away from CPI escalations at all costs. They leave you completely vulnerable to volatile inflation shifts. Your rent could be stable for years before you’re blindsided by an expensive escalation in an already hard financial year.

Rent Abatement

The other point to consider is how rent abatement influences the total cost of the rent. Rent abatement is a period in which you occupy the space but do not pay rent. It is a standard landlord concession that your Tenant Rep will wish to include in your lease. With rent abatement, your company’s first-year budget will likely be happy to not have to make rental payments. Be careful, though. If your landlord offers you a longer rent abatement term, you may be subject to a higher base rate when you start paying or more frequent escalations.  

Rent is one of many considerations when finding the best office space for the best price. Learn the rest in the free course below. 

Renovation Costs Outside of Tenant Improvement Allowance

Transforming a leased property to a space where your company can thrive will likely take some renovations. Your landlord will usually contribute a Tenant Improvement Allowance (TIA) to cover these expenses. Any renovations that exceed their allowance will fall under your budget.  

As a result, it is vital to understand where your allowance begins. If you are in a first-generation space, far more work is required to get the office in working order. You want to ensure that you are not paying for the base construction costs for someone else’s building.  

A True Tenant Rep™ will ensure that the only costs you incur are specific to your occupancy and its length. Accordingly, they are apt to get the landlord to start the TIA from a warm, vanilla shell. That way, you only have to reach into your budget for above building standard, company-specific enhancements. 

You, the tenant, must ascertain the beginning point from which you are responsible for buildout. If not, you could be paying through the nose to get your landlord’s building in workable condition.  

Operating Expenses

Operating expenses are an umbrella term for all costs necessary for running a building effectively.  They are an extremely significant cost, so properly negotiating them is critical. Usually they cover:  

• Common Area Electric 
• Office Cleaning
• Water 
• Trash Removal  
• Security  
• Landscaping  
• Property Taxes 
• Common Area Maintenance 

Depending on your lease type, your responsibility to deal directly with these costs will vary. If you are looking for office space, you will likely sign a full service / gross lease. In this agreement, you pay the landlord a base rent covering all additional charges. The landlord funds the operating expenses or vendors through this lump sum payment. 

This is opposed to triple net leases, the other most common lease type. However, triple nets are usually associated with warehouse space or build-to-suit properties where one tenant inhabits the entire premises. With this agreement, the tenant pays a lower initial base rent to the landlord because they pay for any other expenses directly.  

At the end of the day, these two lease types usually come with the same total occupancy costs; they're just packaged differently. See below for a mock difference in base rent payments and OpEx for a suburban office. 

Depending on your lease and term, your landlord may pay for a portion of the operating expenses. It usually appears as an expense stop.

You and your landlord will concede to an amount they will cover, and any expenses beyond that are passed through to you, the tenant. Often the expense stop will be determined from a base year of operating expenses. However, this can quickly get complicated for tenants in new, multi-tenant buildings. If the building is not fully occupied, your landlord will "gross up" the operating expenses to what would be incurred if the building was at 95% capacity. 

Security

In recent years, rising crime rates have led to an increased focus on security in offices and commercial spaces. Companies are now spending more money on security measures to protect their employees and assets from potential threats.

Commercial landlords may or may not cover security costs for their tenants. It largely depends on the terms of the lease agreement between the landlord and the tenant. Some landlords may include security measures such as security cameras, access controls, and security personnel as part of the building's amenities and cover the costs themselves. In other cases, tenants may be responsible for covering security costs as an additional expense if they choose to take it further.

It's important for tenants to carefully review their lease agreement to understand what security measures are included and who is responsible for covering the associated costs. Many companies are also reaching in their own budgets to hire security personnel to patrol their facilities and respond to any incidents. It is key to keep this in mind as a potential future cost.

Let a Tenant Rep Negotiate Your Occupancy Costs

As you can see, there’s a lot to keep track of when it comes to minimizing the cost of your occupancy. That’s why a True Tenant Rep™ is essential when negotiating the costs of a commercial lease. They can provide you with valuable market insights, negotiate on your behalf, and provide guidance throughout the entire process. With a True Tenant Rep™ on your side, you can be confident that you are getting the best possible lease terms and minimizing your occupancy costs.

Working with a True Tenant Rep™ can help you negotiate lower rent, but not just lower rent, operating expenses and escalation rates too. Learn the methods True Tenant Reps™ use to find the best office space for the best price.