Everything You Don’t Know about Leasing Office Space

Co-founder of ChooseWhat.com Gaines Kilpatrick knows a thing or two about leasing office space.  As Director of Brokerage for MetroNational in Houston, he managed the leasing of a 1 million+ square foot portfolio of office space.  He also has experience leasing office space at every stage of our development, from the executive suite level to a 3,500 square-foot office space with a custom build out.  In today’s post, he shares some helpful tips for business owners looking for a new office.

Gaines encourages people to consider the following five areas before they start looking for office space.

1.  How Much It Really Costs

Tip:  Look for a low Add-On Factor.

Leasing an office space is very different from leasing an apartment or place to live.  The cost structure for leasing an office is based on the cost per “rentable” square foot per year.  However, rentable square feet are different from usable square feet. “Usable” square feet are the square feet in your office suite.  (If you took a tape measure and measured your office space, you would get the “usable” square feet.)  However, you pay for “rentable” square feet, which is your “usable” square feet plus your pro rata share of the building’s common areas (e.g. lobby, bathrooms, corridors, etc.).

Building owners determine “rentable” square feet by applying a percentage “add-on factor” to your usable square feet.  For instance, if your building has 10% common areas, and your office suite contains 1,000 square feet, you would pay for 1,111 rentable square feet (1,000 / (100%-10%) = 1,111).

You should always compare office space alternatives on a cost per usable square foot basis.  Add-on factors can range pretty significantly from building to building, sometimes even between different floors within the same building.  As a general rule, a lower add-on factor is more cost effective for tenants.

Tip:  Look for a Full-service Lease.

There are two main ways rent is quoted:

  1. Full-service/Gross lease, which is all-inclusive, meaning that all utilities and janitorial services, taxes, insurance and common area maintenance (CAM) are paid for
  2. Triple Net (NNN) lease, which means that on top of the rent, you pay your pro rata share of taxes, insurance and “common area maintenance” (CAM) fees

Your first question should always be “NNN or Full Service/Gross?”  Comparing a NNN rate to a Full Service/Gross rate is like comparing apples and oranges. You need to figure out what the total cost to you will be for all the various alternatives and compare those figures.

Triple net charges will vary significantly from region to region but are typically $10+ per square foot.  According to Gaines, triple net charges in Austin, Texas can be as high as $15 per square foot.

Occasionally, you’ll see a rate that includes some NNN charges or utilities.  This type of lease might be called a Net lease or a Modified Gross lease.

2.  How Much Space You Need

First and foremost, you should consider how many people you’re trying to accommodate.  Second, you should think about parking.  Most office buildings have a parking ratio, which is the number of available parking spaces per 1,000 square feet.

For example, if you have a 3 per 1,000 parking ratio, you have to lease 1,000 square feet to get three parking spaces.  So, if you have five employees (1000/3 x 5 = 1,667) you need to rent 1,667 square feet to have enough parking spaces for all your employees.

Some buildings, such as medical or retail, might have a higher parking ratio, or there might be off-site parking available.  Those types of scenarios might allow you lease less space to accommodate your people.  200 square feet per person is a pretty good minimum amount for a high density office with lots of work stations and few private offices.

3.  Using a Broker vs. Making a Direct Deal

Typically, tenants don’t have to pay their brokers, but that doesn’t mean brokers work for free.  The size of their fee is based on two main factors:  rent and time.  A broker will make the same amount of money on a 1,000 square-foot lease with a five-year term as on a 5,000 square-foot lease with a one-year term.

If you can sign a long term lease and/or you need a lot of space, you’re probably a good client for a broker. Since it won’t cost you anything, and will save you a lot of time and provide with you significant market knowledge, you should hire a broker.

On the flip side, if your business is just getting started, you probably want to lease a small space with a short-term lease in order to have maximum flexibility. Requiring flexibility makes you a nightmare client for a broker.  However, building owners and their representatives always have small spaces that they’re trying to lease.  If you can find a space that’s already configured the way you want it and you don’t have a broker, the out-of-pocket costs to the building owner are minimal.  In this situation, it should be pretty easy to get a short-term lease.

Note:  Gaines says it’s also important to note that commercial leases are not promulgated (i.e. the forms are completely negotiable).  So, it’s important to get a real estate attorney to look over your documents before you sign.

Tip:  Never hire a residential broker to negotiate a commercial transaction for you.

Most brokers are specialized, and you can find a number of brokers basedon the type of space you need. For retail, you want to look for a retail broker.  For office, hire an office broker.  Never hire a residential broker to negotiate a commercial transaction for you. Residential real estate has been largely standardized in an effort to protect consumers.  The same is not true for commercial real estate.

“Just like you wouldn’t go to the eye doctor for a heart transplant, you should not trust a residential broker to handle a commercial transaction,” says Gaines.

Hiring a broker who’s not qualified will cost your new landlord money and will not add any value to you.  You’re more likely to get a fair deal if you work directly with a landlord than if you force that landlord to work with an unqualified broker.

4.  Type of Office Space You Need

There are many different types of commercial space: office, industrial, retail, medical, executive suite, etc.  Office space is in an office building.  Retail space will have higher visibility from the street and is better for retail customers.  And space that is specifically built for medical use typically offers more available parking spaces per square foot.  The pricing is different for all these different types of space.

A one-man shop or small office should consider an executive suite, which is often advertised in the classifieds. A typical executive suite includes a small to medium-sized office with a shared reception area, conference facilities and a break room.  In addition, many executive suites provide a receptionist, phone service and other administrative services for an additional fee.   You’ll pay more than you would pay for your individual office, but you typically would not be able to lease that small of a space.

A typical office building has 5′ windows, and there is at least 34′ from the windows to the hallway.  It’s against code to build a wall into the center of a window, so the minimum you could lease would be 10×34′, which is 340 usable square feet.  Throw in a 15% add-on factor, and you have 400 rentable square feet.

A reasonably priced office building in Austin, Texas will cost you $20 per rentable square foot, Full Service/Gross, which equates to $667 per month. A 10’x15′ executive suite will cost a little more, but you’ll get all the other amenities.  It’s also virtually impossible to find a space that small.

5.  When to Look for Office Space

Because commercial leases are typically longer than residential leases, there’s more lead time to look for a new office space.  For commercial spaces other than executive suites, it’s common to start looking six months in advance of your move-in date. Conversely, “if you’re looking for an executive suite, you could probably find one right now and move in immediately,” says Gaines.

Also, keep in mind that there are other factors that will take some time to square away.  It’ll take you several passes to get the lease document in final form, and you need to obtain permits to build out your space.  Planning for these events will help the transition to a new office space go more smoothly.

So, you’ve found a new office and are ready to move in.  Instead of taking your old fax machine and desktop phones when you move, switch to online faxing plan and virtual PBX services.

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