Sep 12, 2018

Beyond Rent: What You Need to Know About Occupancy Cost

By Don Catalano


Beyond Rent What You Need to Know About Occupancy Cost
If you think that the only occupancy cost that matters is rent, you could be in for a big surprise. The net rent that you pay is only a small part of the cost of occupying commercial real estate space. Not only can the other costs add up to more of your rent, but they can also be unpredictable from year to year. Beyond the Common Area Maintenance (CAM) charges that many buildings levy, here are some of the line items that could apply to your business.


Hidden Occupancy Cost

Many markets have hidden occupancy costs that have nothing to do with real estate. For example, if your business locates in the city of St. Louis, your employees will face a personal earnings tax. Outside in the suburbs, there is no tax. While this tax might not have anything to do with your "official" occupancy cost, locating in the city means that you either have to pay your employees a little more, or you have to tolerate them making a little less and, potentially them being a little less satisfied.


The Cost of Dead Space

When you think about "textbook" operating costs like CAMs and rent, they usually get calculated on a per square foot basis. However, not every square foot is created equally. Depending on the shape of your space, you could end up with areas that are unusable. In other words, if you need to lease 3,300 feet to get the same capacity as you would in 3,000 feet of a better laid out space, your occupancy cost is actually 10 percent higher.


Load Factors

The building's load factor is another expense that is easy to overlook. In most buildings, your occupancy cost includes your space and your proportional share of the building's common areas like hallways, restrooms, lobbies and amenity spaces. If your building has a 17 percent load instead of 15 percent load, you pay for an extra 20 square feet for every 1000 square feet you lease.


Building Charges

Landlords might find ways to get additional money out of you. Signage fees, parking fees, after hours HVAC fees and the like can all add up quickly. Look carefully in the terms of your lease for even more building charges. Admin fees on CAMs, markups on maintenance labor or even requirements that you use "the building's" coffee service or caterer could all add up to real money.


Tenant-Paid Utilities and Services

Just because you pay rent and CAM doesn't mean that every occupancy cost is included. Additional insurance, cleaning costs and tenant-billed utilities can all add up as can repairs that you are required to make to your space. Many of these tenant-paid charges can vary greatly from year to year, making it hard to predict your overall cost of occupancy over the long term.


Like this article? Here are a few similar articles:

Commercial Occupancy Cost Analysis

What Factors into My Occupancy Costs?

Hidden Occupancy Costs in Your Company's Leases


Subscribe to our blog for more Commercial Real Estate articles!
Subscribe Now


Office Space Calculator Use Now
10 Steps to Cutting  Your CRE Expenses Download
Improve EBITDA by Cutting Your RE Costs Download


Don Catalano

Don Catalano