By Lynn Drake
June 30, 2011
You take a look at a property to lease and your mind fills up with a thousand dreams and questions. You want enough space for all your employees, a nice lobby and adequate parking. But the question of space goes far beyond the four walls. The better educated you are in “space,” the more you can explore this universe with ease.
When thinking of office space, just envision a place where people occupy cubicles and punch computers. These types of buildings are further broken down in class A, B or C. An “A” property usually represents a building less than seven years old, or thoroughly rehabbed in that same time period.
Premium space often offers a cafeteria, atrium and swift elevators. Moving down a notch, “B” buildings may have similar features without the updates and “C” represents an older building or one in a less desirable area. Ask yourself how many clients visit your office and how important it is to have a prestige address.
Now you need to figure costs. You are charged for rentable square footage not the actual office space you are leasing. That is because the public areas make up 10 to 15 percent of the building. Each tenant is charge a percentage of this common area which is added to the usable square footage to give one price for rentable square footage. Look over your paperwork carefully to see what is included.
Retail space represents plazas and places where people go to buy goods and services. We sometimes see office clients leasing space in under-utilized strip centers. Never assume you can put an office use in one of these buildings unless you double check with the zoning department of a local municipality.
Industrial space represents an area where products are manufactured or stored. These building have several different types of features. Some have dock bay doors so trucks can back up to them to unload product. Or they could have an overhead door so a truck can drive into the facility. Ceiling height may or may not be a factor depending on what the space is used for. Understanding power needs is essential in this type of building. As with other building leases, make sure the designed use is compatible with local zoning.
Now that you understand the first questions about space, you need the vocabulary to negotiate effectively.
CAM stands for common area maintenance, including the parking lot, atrium and elevators. Office building managers often include this fee in the monthly lease.
NNN stands for net/net/net which means the tenant pays for common area maintenance, taxes, insurance and capital improvements. We rarely see a true n/n/n lease because capital costs are often borne by the landlord and then charged back through amortization.
Clients must be careful to question how these costs are divvied up I have seen clients who didn’t understand this difference and got stuck paying for a new roof on a building when they only have a year left on a lease. It is critical to know who pays for what and how it is divvied up.
Base year calculates the cost of operating a building per square foot in a particular year. For example if you seek to rent a 50,000 square-foot building and the total cost to operate this facility in 2008 was $300,000, the cost to operate the building that year was $6/s.f. or ($300,000/50,000). If in 2009 the cost goes up to $6.30/s.f. the tenant now will have to pay an additional $15,000 ($6.30-$6.00=.30 x 50,000s.f.)
Calculating rent per square foot: The asking rent is the square footage times the rentable square footage. Example $20 x 5,000= $100,000/year divide by 12 and your get $8,333 cost per month.
Office tenants usually pay a modified gross rent. That means the rent, electrical charges along with any increases in common area maintenance over the base year. Usually the landlord will build out the space to meet the tenant’s needs.
In a retail outlet the tenant gets what is referred to as a “white box.”
The tenant then pays N/N/N plus for any improvements needed. Be aware the tenant is usually responsible for repair/replacement of the heating and cooling systems inside the rentable space.
Office tenants moving into retail space get that “deer in the headlights” look when they realize they didn’t calculate the rent correctly. These buildings are rented on an n/n/n basis. So if the rent $4.65/square-foot, and the nets are an additional $2.35/square-foot, the cost to the landlord is $7. The tenant must also pay its own utilities and inside janitorial.
Industrial space is leased in the same manner as retail. Improvements to the leased space are negotiated up front.
If a deal looks to good to be true check the fine print and ask lots of questions. For example if you are driving down I-696 and see a sign that says $1/square-foot for office space make sure to ask whether the price is based per month or per year. Is this an n/n/n lease or a modified gross lease? Who is paying for the improvements? What is the rent in the second year, does it have a balloon clause attached?
It won’t take you long to figure out the cost is too good to be true. The better you can negotiate the figures and read the fine print, the better you can gauge your costs and the better the likelihood of being happy in your space.
Lynn Drake, president of Compass Commercial a Troy-based company specializing in all phases of tenant representation for local and national clients. With 20-plus years of leasing experience she helps entrepreneurs and executives identify the right space at the right cost. This is the first of a three-part series on understanding real estate. Reach her at www.compass-commercial.com.