Each building is unique in the benefits it offers to its tenants and the costs that the landlord passes on to the tenant. In this regard, there are many things to consider, and below are a number of factors that may significantly vary from building-to-building.
Load Factors/Loss Factors/Common Area Factors:
In general, this refers to the shared common areas in a building. By design, the loss factor can vary from 0% to 25% or so. Generally Class A and B professional office buildings are designed with about 15% of the edifice allocated to lobbies, hallways, common area restrooms, elevators, columns, and stairwells. These factors will directly influence your rent. For example, if an office space is measured at 4,000 SF and the loss factor for the building is calculated at 15%, 600 SF (4,000 x .15) will be added to the usable square feet to account for that proportionate share of commonly used areas in the building. In this example the landlord will charge rent on 4,600 rentable square feet.
Note: Elevator banks located in the center core of the building rather than the side and an abundance of columns in the leased space can contribute to a higher load factor.
After-Hours Air Conditioning:
In full service office buildings, the air conditioning is often run on a chiller system. The air shuts off at the end of the building’s “business hours”, typically 6:00 P.M. Monday through Friday and 1:00 P.M. on Saturday. Usually, owners of full service buildings charge tenants a premium – typically $30.00 to $75.00 per hour, to run the air after business hours. These additional A/C charges could significantly increase a company’s occupancy costs. Many companies and professional practices sign leases without even thinking about this issue in advance. For example, accounting professionals in tax season practically run their A/C around the clock for approximately two months.
To quantify the impact of this example, consider the following: 6:00 P.M. to 10:00 P.M. Monday through Friday, 1:00 P.M to 5:00 P.M. Saturday and 9:00 A.M. to 5:00 P.M. Sunday totals 32 additional hours per week times 4 weeks totals 128 hours at $40.00 equals $5,120.00/month or over $10,000 extra during high season – for air conditioning. This happens when businesses work without a professional that has in-depth market knowledge and is advocating for their best interests. If your company often works outside of typical business hours, this issue needs to be considered and negotiated prior to signing a lease.
Physical Condition and Property Management:
Most people consider only the physical appearance of what they can visually see; however, other factors must also be considered that are not as obvious. These factors include the quality and age of the roof (especially in South Florida); the quality, type and age of the a/c systems; integrity of construction of the building; ability of the windows to withstand 150 mph hurricane winds; redundancy of the telecommunication systems; and resistance to environmental issues such as mold and mildew. Prior to signing a lease agreement, familiarize yourself with the answers to those issues and be certain that the property management company is proactive rather than reactive, or even passive or evasive. These latter management styles are challenging for tenants with long term leases and/or in older buildings and.
Many buildings don’t properly address the parking issue; however, parking is often a major concern. If there is insufficient space, you or your clients may be forced to park blocks away and walk to the building in the blazing heat or pouring rain. Your company must know what rights they have to parking spaces and what recourse they have if a landlord does not properly manage their parking. Prior to leasing, it would help to know what tenants are currently in the building and who is negotiating to lease space that may negatively impact the parking. Oftentimes, parking is very limited in central business districts, and the impact of one new tenant can make a big difference. You may have no control over tenants that take occupancy after you sign the lease, but you do have the ability to negotiate this issue in advance so that you are protected in this regard.
What goes up must come down, but you may come back down by stairs or be stuck between up and down for a while. Beware of older buildings with original elevators. Do not be deceived by stylish new aesthetics in elevator cabs. If you lease in a building that was built prior to 1980, verify the reliability and speed of the elevators, especially in mid-rise to high-rise properties. If you have not done your homework on this issue, it could prove to be a major source of frustration to you, your employees, and your clients.
Security has had new meaning since September 11, 2001. A guard in uniform used to be sufficient as a deterrent to theft; however, today there are more serious security concerns. You need to make sure that the company providing security is established and thorough, and provides high-quality service.
Signage visibility may be unimportant to a collections company that would rather remain anonymous; however, signage may be very important to a high profile financial services, accounting, or law firm. Generally, whether a company can obtain signage depends on the amount of space that they lease from the building and the extent of their lease term. Monument or roof-line signage is generally reserved for the larger and most credit-worthy tenants. Visible signage may be the pivotal factor in a leasing decision for some prospective tenants.
When selecting space in a building, learn whether or not any tenant in the building can have the right of first offer or refusal to space adjacent to yours, or anywhere that will impact your business. If your company has any intention of expanding or renewing at the end of the lease term, you must have this information to know if you will be landlocked or at risk in the future. Do not place yourself in the precarious position of being at the landlord’s mercy. The time to secure your place in the building by providing for expansion rights and your “right of first refusal” is at the time of your initial lease negotiations.
In most cases, landlords have provisions incorporated in their template leases for the operating expenses or Common Area Maintenance costs to be passed through to the tenants. In this case, the CAM is generally based on 95%-100% occupancy, even if the building is only 50% occupied. For example, janitorial service in a 50% leased building could be charged out to tenants with Gross-Up clauses as if the service were being conducted in 100% of the building. This translates to the tenant being responsible for considerable CAM fees for controllable expenses such as janitorial service, air-conditioning, pest control, etc. Before you sign a lease, you need to know whether or not they have a “Gross-Up” provision and how much that will cost you. If not, this cost could be a huge expense to your company and major profit center for the landlord.
Annual Rental Increases:
The only constant is change. The cost for rent is a “change” that will almost always increase on an annual basis. Some landlords increase rent based on a fixed rate while others believe the increase should be tied to a financial index, the most commonly linked index is the Consumer Price Index (CPI)* The CPI measures the cost of food, clothing, recreation, residential rents, and other goods and services, but has no component relating to commercial rents. The components of an index such as this may increase far more than the general inflation rate of the cost of running a building. The CPI-W is a national index and covers only urban wage earners and clerical workers whereas the CPI-V covers all urban wage earners and clerical workers. The CPI-U covers all urban consumers, and is generally favored as an index for rent escalation because it covers about twice as many people and is less volatile.
Naturally, however, if you want to insulate and protect your company from fluctuations in the base rent (or gross rent without stops, if you’re lucky) then you must negotiate and fight for a fixed rate, preferably close to 3%. Most fixed escalation rates for traditional office buildings range from 3%-5% annually. The most favorable form of escalation; however, may be the fixed, non-compounding escalation. This way, the rent increases – but slower. For example, if the lease rate for 10,000 RSF Year 1 is $30.00/RSF, and the escalation is $0.80/RSF – as opposed to 3%, the lease rate increases, but it does not compound. In this example, the tenant saves nearly $13,000 – just by using a fixed rate rent schedule as opposed to a percentage-based one.
*Note: Some landlords index their rent escalation to keep their books private and prevent costly, time consuming reviews of expenses that may produce legitimate disagreements and credits to tenants.
Whether your company will be protected in the event of a fire, natural disaster, or other emergency event will depend on the provisions in the lease. If the lease is unfavorable to the tenant and does not outline and provide rights for abatement of rent and operating expenses, or the ability to terminate the lease if repairs have not been completed within a commercially reasonable and established amount of time, this may not be the appropriate building for your company. It must be negotiated prior to signing the lease – because if a disaster does indeed occur, the provisions of the lease will govern and “the mercy of the landlord” is what you will seek if the lease were not negotiated adequately in advance.
If your prospective building is in negotiations for purchase by a new owner, it could change everything that you considered when entering into the lease. Some new owners pour money into a property and completely refurbish their new building to your benefit. Of course, that will likely translate into higher lease rates when you are ready to renew (another reason to negotiate specific renewal rights at the time of the initial lease). Other new owners may “bleed” a property, and if so, it will deteriorate. They take the monthly rent and use it towards other purchases and expenses – while neglecting the subject property. The only way to assure that your building will continue to look presentable is to provide for the maintenance and certain aesthetic considerations in the lease.