For many companies, occupancy costs for commercial real estate leases are among their largest expenses. Because so much of your budget is likely devoted to your commercial lease, it's important that you know where every single dollar is going. To avoid being caught unaware by sudden increases in expenses or paying more than you should, be on the lookout for these hidden occupancy costs.
1. Rent Escalations
Most long-term commercial leases allow landlords to increase the base rent at certain points within the lease. If your lease includes such language, you don't want to lose sight of the escalation terms and schedule when budget forecasting. This is particularly important if rent increases are tied to a third-party index, such as the Consumer Price Index. With this type of rent escalation clause, economic volatility could lead to sudden dramatic increases in rent. Leases that allow one or more periodic, fixed-sum escalations are less likely to result in costly surprises. Renegotiating your lease to switch to a fixed index or to place a cap on the indexed increases can reduce hidden occupancy costs.
2. Miscalculations
Don't assume that your landlord's math is correct. Miscalculations could be lurking in the language of your lease that are causing you to pay too much. Double check that the usable square footage measurement used to calculate your rent is accurate. In addition, determine how your landlord calculated the load factor used to assign your common area maintenance (CAM) fees. You should crunch the numbers with the load factor to double check that the CAM is correct. If you have any doubts about square footage, consider hiring an architect to measure the space.
3. Tenant Improvement Shortages
If your landlord is providing an allowance to improve your space prior to move in or after a renewal, beware of hidden costs. Often, the tenant improvement allowance does not cover all of the renovation costs, and when this occurs, the tenant is usually on the hook to cover the difference. That's why it's important to estimate the total costs of the improvements that you're requesting and then calculate the agreed upon allowance. Staying involved in the process of comparing bids from contractors and keeping up to date on the progress can also help to minimize the risk of shortages.
4. Additional Fees
Make sure to read the fine print of your lease carefully to look for additional fees not covered by the CAM. Some landlords may try to assess management or administrative fees, and it may be possible to negotiate their removal. In addition, look for situation-related fees such as snow removal fees or after hour fees that are incurred if your employees work late at night.
5. Missing Refunds
In some cases, the lease may require your landlord to provide you with refunds if expenses covered by the CAM or otherwise paid through your gross rent are lower than anticipated. If this is the case for your company, conduct an audit to ensure that the refund amounts were correct and that they were received as promised.
Here are a few other articles we think you'll enjoy:
Negotiating Your Commercial Lease 101
5 Commercial Real Estate Trends Through the End of 2020
How to Renegotiate Your Commercial Rent After the Pandemic
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