A Guide to Leasing Commercial Office Space
Leasing commercial office space often involves a unique set of complexities and elements. Today’s post will boil these complexities and elements down to a very basic level. The goal is to provide a simple guide to assist startups in finding the ideal work space, under reasonable terms.
Typical Pricing for Commercial Office Spaces
Generally, commercial office space is leased on a “dollars per square foot per year” basis. For example, you may see lease pricing in terms such as $15/foot; 3,000 square feet. Under this scenario, the lease would be $45,000 per year, paid off in monthly installments of $3,750. The landlord may also require a security deposit, similar to when you rent a residential space.
Useable Square Footage
Often, the numbers aren’t as simple as they may appear above. For commercial leases, there’s often a distinction made between quoted square footage and “usable square footage.” The 3,000 mentioned above, may include a number of areas that are not useable—including support beams, common areas, and mechanical areas. One way to avoid paying for space you can’t use is to require the broker or building owner to provide you with useable square footage. You can also hire an architect or contractor to measure the useable space for you.
Tenant Improvement vs. Landlord Improvement
Depending on the commercial space you are seeking, you may want to make certain improvements to enhance your ability to utilize the space. The building owner may offer to build the improvements to your specifications or grant you the ability to make the improvements yourself using a “tenant improvement allowance.” Under the second approach, the landlord may grant you a certain amount of money to construct your improvements. Typically, you would submit receipts for the improvements to the landlord or bill them directly. In most cases, it’s easiest (and less risky) to have the landlord make the improvements.
Terms of the Lease
Typical lease terms are 3-5 years. Each year of the term there may be a clause that calls for an increase in rent. Be aware of these increases in rent, and make sure they are reasonable considering the market and location.
Finding the Right Size Space- Options When You Outgrow the Space
In order to ensure you find a space that fits your company, you’ll need to assess the potential for growth of your company. If you’re a high-growth company, you’ll need a space that allows you some room to grow. However, you don’t want to waste money on too large of a space even if you anticipate future growth. There are a few options in case your company grows faster than you anticipated.
First, you can look for more space in the same building. Assuming you’re in a commercial office building with other tenants (and thus, spaces), there’s a good chance you can find more space without having to relocate your offices. Whether or not you occupy adjacent spaces is irrelevant. Obviously, the closer together your offices are the better. But with stairs and elevators, your other office space is only a few minutes away (and offers, perhaps, a reason to leave your desk every once in awhile).
Second, you can move to a larger space at a new location and sublease your existing space to another tenant. Keep in mind, subleasing can lose you money. If the market has declined since you took the space, you’ll likely have to sublease the space for a lower rent.
Third, you can ask your landlord for an early termination from the lease. If the landlord agrees, you’ll be able to terminate the lease and walk away from the less than adequate space. The landlord may be willing to terminate the lease is the market has jumped and you are currently paying rent that is below the standard market rate.
One thing to try and negotiate for is for a buyout option in the lease. The buyout option allows the tenant to pay more than the agreed upon rent for a period of time in order to terminate the lease early. For example, the tenant may pay triple rent payments for a period of six months in order to terminate the lease early. Generally the tenant will be required to give notice prior to exercising the buyout option.
Other Costs to Consider
When leasing a commercial space you should keep in mind (and decide) who is paying for certain items—those not common in residential leases— such as air conditioning, hours of freight elevator usage, bike access, etc. In addition, you’ll need to negotiate who pays for plumbing, heating, internet, connectivity, and other commercial building associated issues. Many of these issues require ongoing management and upkeep.
If you’re looking to lease a space in a commercial office building or you’re curious about additional commercial lease considerations, please contact us or submit your question to our free, confidential Q & A service.