Leasing corporate real estate helps your company free up capital while letting it have a nimble portfolio that can quickly adapt to shifting markets. Unfortunately, leading space is rarely inexpensive. In fact, it's frequently more expensive than you may expect. Once you've done your due diligence and identified what a space should cost, here are a few items that you may not expect that you can work into your budget:
Know your load factor.
The old rule of thumb that you divided a building's usable area into its rentable area to find the load factor doesn't work any more. Your owner could choose to calculate different load factors on a by-floor basis, and if you're on an inefficient floor, you could be in for a surprise. On the other hand, if you're on an efficient floor, don't be surprised if he decides to charge you a building-wide load factor. If your lease ends up being favorable to you now, you may want to add a little cushion to your corporate real estate budget for future renewals.
TIs won't stretch as far as you expect.
Look carefully at your lease and work letter. Many landlords require you to complete TIs with their contractors using their recommended materials, fits and finishes. This is especially likely if they're fitting the bill for some or all of your TIs. These requirements frequently increase the cost of your tenant improvements and can be real budget-busters.
CAMs will fluctuate.
While your corporate real estate budget already takes rent escalators into account, you also need to project CAM increases. Especially as we continue coming off of the recession, owners that deferred necessary maintenance when their vacancy was high and rent collections were low are likely to step up the work that they do to their buildings and pass through to you. When you combine this with the increases that occur in CAMs naturally, you could be in for a surprise.
Reconciliations aren't always in your favor.
While CAMs fluctuate yearly, the budgets on which they're based frequently don't match the day-to-day reality of operating the building. Given that building operating costs are more likely to fluctuate upwards than downwards, a shortfall is more likely to happen than a surplus unless your landlord is overcharging you throughout the year, just in case. Given this reality, it's wise to ensure that your corporate real estate accounts have extra cash during reconciliation season so that you can cover these expenses.
Options might not protect you from big rent increases.
If your leases are written with options that cap the rental increase to a predetermined amount, you should be protected if the market rent jumps. However, many extension options are written with rents adjusting to 95 percent of fair market value. This language leaves your business completely exposed to the market, so if the market is doing well, you could need to budget for a meaningful increase in your cost of occupancy.
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