“Total cost” encompasses more than the rent.
When negotiating a commercial lease the “total cost,” including each of these factors, must be considered:
- Loss factor: The difference between the rentable and the usable square feet. In New York City, a commercial space which is 10,000 rentable square feet might only contain 7,000 usable square feet. It is important to know the difference.
- Free rent: Sometimes a landlord will draft a lease where the face rent is very high, then give copious amounts of “free rent” to justify the higher face rent amount. The landlord may have a strategic reason; they can later go for financing and leverage, the fact that they are technically charging $80 per square foot, even if the effective rent is $60 per square foot because of the free rent.
- Construction contribution: How much is the landlord contributing to the construction of any necessary tenant build-outs?
- Flexible rights: Sometimes tenants are willing to pay extra for the “right to cancel,” the “right to extend,” or the “right to expand.” The more options the tenant secures, the more valuable the lease.
- Local law compliance: Many commercial leases contain clauses referencing tenant compliance to local laws. For instance, in New York, most buildings will be required to have a sprinkler system by the year 2019 - something which many buildings do not currently have. Installing them is the responsibility of the tenant in many lease agreements. In other words, a large capital expense that outlives the tenancy and benefits the landlord is often the responsibility of the tenant. It should not be, but it may be a cost of the lease.
- What other costs or services are included? There are other costs that landlords either pay or pass on to their tenants, such as electricity, escalations, plan reviews and sublease reviews. In addition, some landlords provide services like security, maintenance, cleaning and trash removal. It is important to consider all of these miscellaneous items and factor these costs into the lease negotiations.
Most tenants are not trained to look at the “total cost” of potential spaces, which can prove costly - but an experienced tenant representative broker can navigate the market with an eye to avoid burdensome provisions. Are hidden costs surprising you?
George E. Grace
Mohr Partners, Inc.
232 Madison Avenue
New York, NY 10016