Aug 14, 2013 9:34:00 AM

A Tenant's Guide to Office Lease Terms

By Michael Sweeney

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When you lease office space, it's not as simple as picking one and setting a price. Lease terms are frequently written in an opaque language of their own. In office buildings, gross leases aren't gross at all and you don't pay rent on your actual usable space. Along the way, your landlord will entice you with concessions that don't cost him anything to give while setting you up to pay more for other freebies. Once you understand typical lease terms and what they mean, you can turn the tables and negotiate more effectively.

 

Lease Types

Office leases come in a few different types, differentiated by who pays for which services of the building. Here are the four most common ones:

  • Full Service Gross: In a full service gross lease, you pay your landlord a single, flat rent amount. Out of the rent you pay, he covers all expenses of the building, usually including your utilities and janitorial service. The only occupancy cost you incur is for your own telecommunications and coffee and water service. 

  • Full Service with Expense Stops: This structure caps the owner's contribution to the building expenses. Some have a dollar expense stop, while others use a base year. For instance, your landlord may agree to pay up to $17 per square foot in expenses, or the lease terms may say that he'll pay expenses at the level incurred in 2012. Any amount over that sum gets billed back to you.

  • Triple Net: In a triple net lease, you pay all of the operating expenses of the building. When they go up, your bill increases and when they decrease, your bill decreases. Triple net leases are popular with many landlords. They're also fair to you since you know exactly what portion of your occupancy cost is rent and what portion represents operating costs. Therefore, a $20 triple net lease with $15 in expenses is actually better than a $35 full service lease with an expense stop. If you increase your efficiency in the triple net building, your costs can go down, but if costs go up in either building, you pay it.

  • Modified Gross: A modified gross lease is anything between Full Service and Triple Net. Under these lease terms, you and the landlord each pay certain line items.

 

Space Definitions

The space you occupy, called your usable space, isn't the space you pay rent on. Most office buildings add your share of the building's common areas to your rent to come up with your rentable square footage. This includes areas such as hallways, common bathrooms and shared amenities. While the amount of extra space you'll get depends on how your building is laid out and how your landlord measures it, it's common for you to pay for an extra 10 to 20%. If you lease a 5,000 usable square foot space, you'll usually pay for between 5,500 and 6,000 square feet. Depending on where you are located, you'll see lease terms like "core factor" and "load factor" used to describe this extra space factor.

 

Concessions

To get you to sign your lease, your landlord will usually offer a blend of concessions. Rent abatements, which don't cost him anything to give, let you occupy the space for free for a period of time. Tenant improvement allowances defray the cost of customizing your space. When you look at the TI offer, look at whether it's offered on your rentable or usable square footage - the former is better. Also, see how much it is relative to your actual construction cost.

These major considerations just scratch the surface of the many different lease terms and requirements that you'll encounter. Landlords can sneak hidden costs in, limit your rights in your space or even set up your lease to automatically renew. To protect your business, it's always wise to have the help of an experienced commercial tenant representative. He knows what the various lease terms mean and what impact they'll have on you. Ultimately, his guidance can lead to you signing a better lease at a lower cost.


Here are some other great Office Lease Term articles:

5 Office Lease Terms to Watch For

Protecting Yourself from Signing the Wrong Office Lease

Commercial Lease Renewal Myths... Busted!

 

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Michael Sweeney