Is your lease up for renewal? Are you considering a move? Do you need to expand?
In any case, you need to be aware of all the potential costs of a lease to assure that you
are getting the best economic lease terms
possible for your budget and business plan.
“Building owners’ goals are to maximize
revenue to their building. They will utilize the
services of a broker and an attorney in negotiations,” states Stephanie Marino, first vice
president in the Corporate Service Group in
the Atlanta office of CB Richard Ellis.
“In order to assure yourself that you are getting a fair deal from your landlord, you need
to do your homework and build leverage by
working with an experienced broker and a
real estate attorney.”
Smart Business talked with Marino about
getting the best deal when leasing.
How do you go about determining the real
cost of leasing?
The first step is to do your homework in the
market. Determine your key business drivers: where you want to relocate, the type of
property you are interested in, space requirements, the potential need for growth and
parking needs. Then shop around and obtain
all the information you can about any properties that meet your needs. This information
helps you create leverage. The more leverage
you have, the better you can negotiate. Keep
in mind that a Fortune 500 company is going
to have more leverage than a start-up company. You also need to know what concessions potential landlords are willing to give.
Typically, if landlord A offers one month free
rent for each year of lease term, landlord B
will meet the same offer.
Are there costs that don’t belong in the lease
category?
Generally, capital improvements to the
building should be covered by the landlord.
Since the rent amount is based on the landlord’s costs, make sure that he or she is obtaining at least three competitive bids for capital improvements. Rent may be based on inflated costs because the work was done by a
profitable captive company of the developer.
It behooves the tenant to make sure that all
categories of expenses are spelled out in the lease as well as who is responsible for each.
Also, typically excluded from operating
expenses are tenant improvements, commissions and most capital expenditures, unless
they are required by governmental authorities or serve to reduce expenses (such as a
lighting retrofit). Those types of capital
expenses can be amortized over the useful
life or as dictated by accounting regulations.
Additionally, marketing expenses, legal
expenses, any services that were reimbursed
(such as separately metered electricity billed
to individual tenants) and any tenant-specific
items, such as locks or signage, are excluded.
Some leases allow for tenant relations to be
passed through if all tenants benefit. Other
leases specifically exclude tenant relations.
What are base rental rates, and how are they
determined?
There are four pools of money to consider.
First is the base building/financing pool. This
includes the base building construction, rate
and financing. Next is operating expenses.
Included here are taxes, utilities, insurance,
common area maintenance, janitorial and
repairs. You need to know who is responsible
for what and what the management fee is. Is
it competitive? Tenant improvements are the
next pool. Is the developer proposing a
‘turnkey’ transaction? Are bids competitive?
What carry costs and profit fees are added?
Who controls the timetable? The fourth pool
is the rental rate and concessions. Here is
where knowing how many properties can
meet your requirements helps. The more
options, the better your leverage.
What operating expenses should be included
in leasing costs?
It depends on the type of lease:
- Gross office lease — Includes taxes,
insurance, marketing costs, property management fees, engineers on-site, landscaping,
utilities, trash collection, snow removal,
maintenance and legal fees, among other
expenses. The tenant writes one check per
month to cover everything. - Modified gross rental rate — This rate is
most used for single-story office buildings
and warehouses. The annual rental rate
includes taxes, insurance and common area
maintenance. The tenant is responsible for
everything else. - Triple net lease — The tenant is responsible for everything except a basic rate paid
to the landlord.
Are there other areas that should be considered when negotiating a lease?
Rent escalation is here to stay, but is somewhat negotiable. The norm in the Atlanta
area is 2.5 to 3 percent per year. In some areas
around the United States, it can be up to 4 or
even 5 percent. It is important to properly
budget for annual increases. Parking fees can
run from free to a premium. They are usually
a small part of the overall cost and are negotiable. Options to renew or expand are also
negotiable. Cancellation options are typically
used in longer leases. You may want the
option to cancel in three or five years on a
five- or seven-year lease, but it may require
you to pay for all unamortized improvements, commissions and a penalty, which
would be a set amount equal to a (pre-negotiated) number of monthly rents.
STEPHANIE MARINO is first vice president in the Corporate Service Group in the Atlanta office of CB Richard Ellis. Reach her at
(404) 504-5950 or [email protected].
