While some markets, like San Francisco, typically quote a gross rent that includes both rent and operating costs, others, like Minneapolis, lease office space on a net basis. This means that the tenant pays rent and an additional "Common Area Maintenance" (CAM) charge. CAMs are calculated by dividing a building's total common area expenses by its rentable square footage and can be quite considerable.
Build-out costs, also referred to as "tenant improvements" (TIs) are the one-time costs that tenants and landlords incur in configuring space. TI costs can vary wildly from market to market depending on material and construction costs. In addition, TI costs change depending on what a tenant needs done. Simply painting and re-carpeting an existing space can be done for around $10 per square foot in many parts of the country. On the other hand, a lavish build out for a law office can cost well over $100 per square foot.
There is another variable involved in calculating how much TIs will affect a tenant's occupancy cost -- the landlord participation. Landlords generally contribute more on new buildings and in weak markets. Buildings with existing TIs, in strong markets, or with short-term leases usually receive less landlord money. For expensive TIs, many landlords take the portion that the tenant pays and amortize it over the lease period.
These extra expenses can push a tenant's occupancy cost well over the initial rent amount. For example, consider an 8,000 square foot lease in a Class A suburban building in a high-tax city carrying a net rent of $18.50 per square foot. CAMs add an additional $12.50 per square foot. A high-end build out could cost $75 per square foot with the landlord paying $35, and the tenant amortizing their $40 over seven years. The amortization and CAM add up to $18.21 -- almost as much as the rent.
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