One major problem I see when tenants are looking at renting commercial real estate is that they don’t factor ALL of the costs when comparing different buildings. Leasing space is more than just rent. There are a lot of other costs to factor in. Also, no two buildings are alike. Some landlords pay for certain costs while others do not, which is why it’s important that you find out who is responsible for what before signing a lease.
When comparing commercial real estate properties for rent it’s important to create an apples to apples comparison and determine the total monthly and yearly rent for each space. You see not all commercial spaces quote rental rates in the same manner. Some properties include electricity in their rent while others make tenants pay for their own electric. Some landlords quote yearly rates (e.g. $36 sf), while others quote monthly rates (e.g. $3 sf). Some Landlords have triple net (NNN) leases, while others have full service leases.
If you find two equally great commercial spaces at the end of the day what matters to you is determining which one is the better deal. To find that out you have to consider all the costs involved, who pays for what, and create an apples to apples comparison of each property. To help you avoid underestimating your overall occupancy costs be sure to consider the following items:
Costs to Consider When Leasing Commercial Real Estate
- Rent – This is an obvious one, however be sure to determine how the landlord is quoting the rate (NNN or full service). Does it include operating expenses or not? Be sure to calculate and compare the total yearly and monthly for each property
- Common Area Maintenance – Maintaining the common areas (e.g. garbage cleanup, parking lot maintenance, roof maintenance, etc..) is typically the responsibility of the landlord however they typically divide up the costs equally based on total SF in the building and pass that to the tenants. These costs are variable and can change depending on what is needed on the common areas.
- Property Insurance – The landlord is going to have insurance on the commercial property as a whole and will pass that cost to the tenants. Again this cost is divided equally to all tenants based on overall square footage in the building to the square footage each tenant occupies
- Taxes – These are more likely to be the major cause of increases and decreases in your NNN. Again tax costs are shared equally among all tenants
- General liability & property insurance – The landlord has property insurance, however you are still required to have your own general liability insurance and personal property insurance.
- Utilities – In some cases the landlord includes utilities (e.g. water, electric, sewage) in your base rent while in other buildings the tenants are required to set up and pay for their own service. You need to find this out! You will always have to pay for your own internet and phone services. When comparing a building that includes electric to a building that does not you need to compare them apples to apples. The way to do this is to add another $1.50 to $2.00 sf per year to the calculation of the building that does NOT included electric.
- Janitorial – Again in some cases landlords pay for this and in others they don’t. When comparing a building that includes janitorial to a building that does not you need to compare them apples to apples. The way to do this is to add another $0.75 to $1.50 sf per year to the calculation of the building that does NOT included janitorial.
- Other costs – Find out who is responsible for paying for pest control, HVAC maintenance, plant service, and any other repairs and maintenance that may be needed.
If any of the above costs are NOT included in the base rent and the tenants responsibility then be sure to get an estimate on the monthly and/or yearly costs per sf and factor that into the calculations of that particular building. Also don’t forget here are a few other things you will need to have.