Nov 24, 2014 9:08:00 AM

5 Office Lease Terms to Watch For

By Don Catalano

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Office Lease TermsIf you aren't a full-time commercial real estate practitioner, the world of office leasing can be fraught with dangers. Words that might seem innocuous, buried in an office lease, could end up costing you money or obligating you to a longer commitment than you may expect. Here are a few terms to watch for and to understand.

1.  Rentable Square Footage

If your office lease refers to rentable square footage -- and most do -- you're going to end up paying for space that you don't occupy. Office buildings need lobbies, hallways, bathrooms and other areas to be desirable or usable. Landlords don't want to lose money on those spaces, so they add them on to your space. When you pay for rentable square footage, you pay for your space and for your share of the shared space on your floor or in your building. The extra space could easily add 15 percent to what you are actually leasing.

2.  Common Area Maintenance

This term might look like a completely reasonable charge for things like vacuuming the halls. While CAMs typically include those costs, they also include just about any cost that covers any part of the building that isn't exclusive to you. While it is very reasonable for landlords to charge CAMs, and they typically come along with lower triple net office lease rates, it is still wise to negotiate them out.

3.  Lease Term

If you sign a lease with a seven-year term, your company is obligated to pay rent for seven years whether or not it wants or need the space. Leases are binding contracts, so it is crucial to ensure that you really want the space for the term of the lease. If you don't, your landlord may offer you a shorter lease, but could charge you more or offer you fewer concessions.

4.  Free Tenant Improvements

Sometimes, landlords will offer generous concessions to get you to move into a building. When they offer free tenant improvements, though, there are two reasons to be careful. First, realize that what they will give you for free may not meet your expectations for fit, finish and configuration. Also, realize that an office lease is, ultimately, just a string of cash flows. If they are putting their own money in up front to pay for your TIs, they may want more of your money over the life of the lease to compensate them.

5.  Fair Market Value

Many landlords like to write renewal options that reset to "fair market value" or, if they are generous, 95 percent of FMV. While this seems reasonable, an option that resets to FMV could leave you with a renewal that is 50 percent higher if rents skyrocket. As long as you are willing to move out, this could be an acceptable office lease structure. However, pre-negotiating a fixed increase -- like 5 or 10 percent -- can make your option much more valuable and useful when the time comes to consider taking it.

Here are some other articles we thought you might like:

Six Office Lease Terms To Avoid

A Tenant's Guide to Office Lease Terms

Mistakes to Avoid in Commercial Real Estate

 

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Topics: office lease terms, commercial real estate, tenant tips, Lease Terms

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Don Catalano

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