Goldilocks was lucky, she got to try out each bed until she found the one that was just right. Unfortunately, when it comes to finding the right commercial real estate space, you don’t get to try them out. Since commercial real estate is one of a company’s biggest expenses and leases are usually signed for five to ten years, tenants should take into account everything that is needed in the new building. That begins with understanding space.
Usable Space versus Rentable Space
The air shaft, the patch of grass with pretty flowers, and the boiler room aren’t really spaces you’re going to use, so why do they matter? The simple answer: you’re paying for them. Usable space is the square footage you actually occupy and rentable space is usable space plus common areas associated with the building (such as hallways, bathrooms, loading areas). The combination of building utility areas and presentation spaces typically make up 10% to 15% of the rentable square footage in suburban offices and upwards of 22% to 25 % in city offices. While your use of common areas is minimal, there’s likely a clause in your lease that says you pay for its maintenance (aka CAM). While paying for maintenance may seem like an absolute in order to seal the deal, a good tenant representative will tell you otherwise. Different types of leases offer flexibility as to who is responsible for property taxes, CAM and property insurance. Click here to see a description of different kinds of leases.
Expansion Rights, Downsizing Options
Most businesses focus on the “cost per square foot” in negotiating commercial leases and miss the chance to use their lease as a strategic planning tool. Companies will hire consultants, architects and designers to plan and design space to maximize utility yet fail to negotiate the right to expand or contract their leased space to match their needs.
The right of first refusal to lease additional adjacent space or a defined expansion option enables companies to limit their lease obligation (and expense) at the start of a lease and gradually take on more space as the business grows. An expansion option at a future date will require the business to assess and plan based on making a decision by a specific date. This option is important to businesses that are just starting out or changing their operations as a result of new products or services.
The right to contract space or “give back” part of the leased premises is also important to negotiate at the beginning of the contract process when the Landlord is anxious to rent the space and make the deal. If properly negotiated, the termination option can permit the Tenant to remain in the space that they need without significant business disruption and reduce expenses at a pre-defined amount that can be managed and budgeted. There is usually cost associated with these options, but it will be less than paying rent on space that is no longer occupied or needed.
Start Thinking Space Now
Don’t wait until the lease is almost up to tackle the task of finding new space. Jackson Cross Partners has a downloadable space planner on our website. Click here to get to the page and then scroll down for the planner. It’s the first in a long process to finding the right commercial real estate fit.