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Things to Consider When Choosing a Location for Your Commercial Space

Whether you’re opening your first public location or expanding to a new one, business owners tend to get more excited about finding a shiny new commercial space than they are determining whether it’s a viable one. But your company’s image and success are as tied to the right location as they are the quality of your services, making the search for the right space a critical factor to commercial viability. 

It goes without saying that many business mistakes or shortcomings can be corrected after the fact, but a bad location is something that’s nearly impossible to correct. That’s why it’s so important to consider the location of a potential new space above all else. Here’s what to look for as you begin your search:

What to Consider When Looking for a New Space

There’s a laundry list of things to look out for when searching for new commercial real estate, but before we break down the specific needs for offices, retail, and industrial space, let’s look at the basic, barebones factors you’ll want to watch out for when starting your search:

Budget – You’ll want to set a fixed budget range to avoid overspending. You’ll want to incorporate taxes, monthly utilities, costs of renovations, upkeep, and any new equipment or furniture you’ll need to make yourself at home.

Available space – Moving to a new office usually means expansion, but you don’t want too much space – or too little. That’s why your space requirements should be measured against your projected business growth over the course of the lease term. Plan to add 150-200 square feet per each future hire in an office or industrial space in addition to any equipment you’ll want to install.

Aesthetics – If you want your business positioned among high-visibility brands, you’ll want to look for space in downtown or business districts. Stores, restaurants, and personal services should aim for street-level properties or space in established shopping structures. 

Competition – Obviously, you don’t want to oversaturate the area with similar services. Opening a coffee shop next door to another coffee shop probably won’t be a successful endeavor, so do your research on companies within walking distance of your desired location before you commit. 

Opportunity for Growth – Especially important for office and industrial spaces, you’ll want to consider the ability for expansion within the building in the event that your company expands much faster than expected. While that’s certainly the ideal situation for any business, it can be a significant headache if you need to break your lease too early and relocate once again if the neighboring space isn’t available. 

Access – Parking is a major issue no matter the industry you’re in. Retail and restaurants need parking for customers, offices need space for clients and employees, and industrial firms require ample space for shipping, delivery, and storage. 

Zoning – Depending on your local zoning laws, an ideal location and space may not be zoned for your specific use. Do your homework into the available zoning designations for the space and your ability to rezone the property to meet your needs if possible. 

Offices

Accessibility – If you’re serving clients, you’ll want to ensure they have access to parking so they can come visit your office without a hassle. But even more crucially, having a location that’s convenient for your employees to commute to work can help motivate your team and help boost productivity. Check for parking, walkability, and access to public transit when looking for a new location. 

Amenities – Studies show that employee productivity increases when workers have access to sunlight, inspiring views, fresh air, and appealing lighting. While these can come with a higher price, sticking your growing business in a basement might not be the best long-term solution for improvement or retention. Secondarily, things like onsite fitness centers, cafes, and daycare facilities will help attract and retain talent. 

Infrastructure – If you’re a company that relies on high speed internet, you’ll want to look for a building wired and serviced for fiber or gigabit internet. Depending on the location, this might not be possible, but as you expand and grow, so will your needs. Ask the property owner about the building’s capabilities and investigate what internet service providers (ISPs) are available in the area. 

Proximity – Being close to thriving shops, restaurants, and bars shows that your company is operating in a growing environment – and it helps with employee morale.

Growth potential – Every office move is (hopefully) an expansion, but if you take on a larger than expected client that requires a greater headcount than you anticipated, you’ll want to make sure that the building has the capability to offer additional space should you need it. 

Retail

Demographics – Obviously, you’ll want to be where your customers are. And while location factors greatly into this (you probably shouldn’t open a dollar store in a boutique shopping mall), it’s also the breakdown of who lives, works, and visits the neighborhood in which you’re setting up shop. These can be hard to quantify, but doing some reverse-engineering on what other businesses see in a location can give you a good perspective. 

Accessibility – Ample parking, easy walkability, and access to public transit are important factors for retail spaces, no matter the city. This shouldn’t be a problem in suburban shopping malls, but dense urban areas are prime for renovation and construction, which could put a damper on a fledgling new business, so do your research on your city’s future planning before making a commitment. 

Visibility – Every company wants to be known to potential customers, but retailers need to be seen. Street-level properties provide opportunities for flashy signage, sandwich boards, and flyers, but if you’re tucked away in an industrial office mall, it’ll be harder to attract anyone but your most loyal of customers. 

Industrial

Space – And lots of it. Any industrial space will need ample room for parking, shipping, and logistics, but growth should also be a consideration. Overspending on industrial space may not sound like a good investment now, but having unused space as your company grows will only lessen your headaches in the future. 

Access – If you’re dependent on your supplies and products moving in and out of your facility on a regular, consistent basis, you don’t want your vehicles stuck in snarling downtown traffic. Finding industrial space along major highways or with easy access to interstates and airports will alleviate your supply chain woes. 

Security – Look around the area – are there lots of vacancies, or is the street full of other industrial companies? Are there chain link fences and barbed wire around some properties? How’s the lighting along the road? Industrial areas are prime targets for criminals, especially if they’re deemed insecure. Check your local crime stats for the area and ask the landlord about the security features at the facility. 

What Tenants Should Ask Property Owners

We’ve covered this topic fairly extensively in the past, so we’ll keep it brief:

  1. 1. What’s the length and type of the lease?
  2. 2. What utilities and additional costs are included in the monthly rent?
  3. 3. Is the lease assignable? Renewable?
  4. 4. What happens if the building is sold?
  5. 5. Has the space been updated in the recent past?

Top Tips for Finding the Perfect New Location

1. Enlist Help

Outside of an internal search committee to help offset some of the stress that comes with a new location hunt, a tenant representation broker and a real estate attorney will help you identify appropriate locations and avoid pitfalls that come with the search. Since they’ll already have relationships and experience in the market, you could gain valuable insights you can’t find online. 

2. Take Your Time – and Don’t Jump at the First Offer

Changing a business location takes a lot of time. Expect the process to take at least 12 months from the time you begin looking. Even if you’re staring down the barrel at a lease agreement expiration, taking your time to ensure you’re finding the right location for your needs will save you from disappointment in the future. 

3. Keep Your Options Open

Especially important during the lease negotiation process, you’ll want to have 3 or 4 other properties on your “probably” list in case your first choice doesn’t pan out. That way, you won’t be beholden to a stubborn property owner and have a fallback option if they’re unwilling to meet your needs. 

4. Speak with Previous Occupants and Neighboring Businesses

It’ll take some time, but doing your homework and tracking down the previous tenant can give you insights into the condition and viability of the space in question. It’ll also give you a look into the actual relationship between a tenant and the landlord. You should also contact neighboring businesses to see if they’re familiar with the property owner and get their opinions on the viability of the space for your specific business. 

Choosing a new commercial space is a complex and time-consuming task, but if you take your time, determine your priorities, do your research, and investigate all your options, you’ll be better prepared to make this important step for your company’s future. 

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Common Questions About The Cost of Opening a Restaurant

In the restaurant industry, there’s a common joke: “What’s the difference between opening a restaurant downtown and burning $1 million on the street?” Answer: none.

Despite the known upfront costs in starting a restaurant, one of the most common mistakes restaurateurs make is to underestimate the initial capital and budget requirements associated with starting a restaurant. 

While every business endeavor – restaurants included – are up to particulars and unique in their own way, we’ve expanded our previous guide to further break down the upfront costs and estimates related to starting a brand new restaurant. When combined with our other resources, this should better equip your company to prepare for the ups and downs associated with budgeting, equipment and build out, and dealing with a potential landlord.  

How Should I Calculate My Monthly Restaurant Rent?

The amount you’ll pay for restaurant space each month is dependent on the market, location, and specific terms you established with your landlord. The easiest way to predict properties that might be in your price range is to analyze the listing, check for the cost per square footage (which is pre-tax), then multiply that number by the square footage of the space listed.

Some landlords will establish different monthly rental terms based on length of lease, your finances, whether you have proven experience in the restaurant business, and the duration the property has been vacant. While these factors aren’t guaranteed, they’re useful leverage when starting a lease negotiation.

What Should I Expect to Spend on Equipment and Build Out?

The primary thing you’ll need to secure in order to start a restaurant is equipment. After all, it’s difficult to cook without a stove. A recent survey by the Restaurant Owners puts the average cost of building out a 1,000-square foot bar and kitchen with the proper gear and equipment at about $75,000, or $80 per square foot. 

Secondhand equipment is likely available, as other restaurants may have closed and need to offload their assets. But just because you’re getting a deal doesn’t mean you’re in the clear. You’ll want to hire an equipment technician to evaluate the equipment before you make a purchase. 

And as far as remodels, upgrades, and repairs are concerned, you’ll need to negotiate with your landlord. Who’s responsible for what? What happens if a larger issue is discovered during the build out? With the demand for architects, construction contractors, and subcontractors in major cities at an all-time high, it’s important to factor in the length and cost of these improvements. Simply installing a new floor in the restrooms could run you as high as $50 per square foot – if you’re lucky. 

How Should I Prepare for Cost Overruns and Delays?

According to the Restaurant Owner, the average restaurant remodel goes over estimates by about 34%. Anything from construction delays, permitting issues,  and contractor and subcontractor schedules can throw a wrench in your plans. Meanwhile, you’re still paying rent and likely have your top-level staff and management hired. Should delays continue, you may lose those you’ve trained to other jobs, which is why budgeting for a six-month rent and labor contingency is recommended to avoid further headaches. 

How much does it cost per square foot to build a restaurant?

Depending on the market and location, it’s estimated that the total investment in building a new restaurant (in addition to purchasing the land and associated soft costs) could range between $250,000-$2.5 million for square footage between 1,000-10,000 square feet.

For example, opening an Applebee’s franchise location requires significant total investment. In addition to the $35,000 franchise fee, it’s estimated that franchisees will need to invest between $1.97-$7.1 million. 

How much does building a commercial kitchen cost?

According to the Restaurant Owner’s survey, the average cost of equipping an existing 1,000 square foot bar and kitchen is about $75,000, or $80 per square foot. Building a commercial kitchen from scratch within an existing space, however, could run anywhere between $250-500 per square foot. This takes into account flooring, walls, lighting, ventilation, electrical connections, fire prevention measures, plumbing, gas connections, and equipment. 

How much does a restaurant remodel cost?

In order to renovate or remodel an entire restaurant (dining room, bar, and kitchen), you’ll want to budget $250-500 per square foot in the kitchen/back of house area and between $150-300 per square foot in public-facing areas. 

If you have a kitchen with 1,000 square feet and 2,500 square feet in the dining area for a total space of 3,500 square feet, you can expect to spend between $400,000 to $800,000 for a complete remodel. 

Depending on materials used, quality of finishes, and craftsmanship, you may be able to cut down costs – or send your budget through the roof. 

How Can I Save Money While Opening a Restaurant?

  1. Buy used equipment: This is one of the easiest ways to significantly cut down on initial expenses. Because the installation of a commercial exhaust hood alone could run into the tens of thousands, cutting down on the actual purchase is highly recommended. Chances are, if you’re moving into an existing restaurant space, the previous tenant will be willing to part with the already installed equipment. If not, look for auctions, restaurants going out of business, or local restaurant supply stores that buy and sell used kitchen equipment. 
  2. Cut corners where needed: You probably don’t need a full staff until 2-3 weeks before your soft open. Rather than keeping them waiting for your restaurant to open and risk losing them to more immediate opportunities, hold off on the initial orientation, training, and trial shifts until you’ve got your soft open dates secured. Furthermore, investing in high-quality menus, signage, and decor right off the bat might not be worthwhile until you’ve had an ample sample size of customer feedback. While it’s important to make a first impression, you won’t know what your customers think of your establishment until you’ve had a steady stream of repeat diners.
  3. Don’t jump on a full liquor license right away: Unless you’re going for a high-end cocktail bar, you can get by with a partial liquor license and serve beer and wine. Because full liquor licenses are often more expensive and time-consuming to secure, offering a full bar at the outset could delay your open date. 
  4. Invest in the important stuff first: High-quality tables and chairs, dining and glassware, and reliable point-of-sale systems will carry your business further than cheap, “it’ll do” solutions that can break down and require replacement. Plus, these elements are highly valued on the secondary market, so even if the restaurant closes, you’ll be able to recoup much of the initial investment. 
  5. Don’t splurge on advertising: While sales and marketing are crucial for getting the word out about your new restaurant, your best chance at earning repeat customers in your area is to keep them informed about your open date. Post flyers, keep your social media feeds current about your restaurant’s progress, and place a limited advertising run in local outlets or social media. You might also invite local media figures, business people, local politicians, social media influencers, and other restaurant professionals to an exclusive soft launch to spread the word and put your best foot forward ahead of a public opening. 

If you’re feeling lost in the dark as your dream restaurant project begins to take shape, you’re not alone. Every restaurateur needs help determining the value of a location, the content of their menus, and researching their prime demographic. But with this information in mind, you’ll be better equipped to handle the turbulent nature of the restaurant and culinary business no matter what city or market you’re hoping to operate in. 

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Best Practices to Inspect a Potential Commercial Real Estate Property

Whether you’re leasing or buying commercial real estate space, it’s a costly – and complicated – endeavor. And as with any long-term arrangement, it’s important to do your homework and protect your company’s best interests. That’s why a careful, thorough property inspection is an essential part of the transaction. By ruling out any potential problems and giving your company a better idea of the space’s limitations or requirements for repairs, a property inspection will weed out unsuitable options and help inform your lease negotiation process. 

While you can certainly inspect the property on your own, it’s always helpful to have a professional property inspector to give you an unbiased look at a potential space. Either way, there are plenty of strategies to inform yourself before you make a commitment.

What to Keep in Mind Prior to the Inspection

During the initial walkthrough, take note of the exterior grounds of the property. Parking lot conditions, markings, landscaping, concrete quality, layout, accessibility, lighting, and general condition of the space. While you won’t know the integrity of the foundation or structural elements, look for signs of damage, wear, cracks, etc.

During the walkthrough, have a member of your team accompany you to take notes whether you conduct your own inspection or hire a professional inspector. It helps to have your own information to compare your findings with that of the owner and the inspector to ensure nothing gets overlooked during the negotiation process. 

What to Look for During the Inspection Process

A thorough commercial real estate inspection should check every aspect of the property, including:

  • -Structural elements, from the condition of the roof, flooring, walls, and foundation
  • -Utilities like HVAC, fiber connection, electrical, and plumbing systems
  • -Local and state codes and regulations have strict guidelines, so ensure you’re up to speed on your area’s specific requirements so you can make your own assessment – and ask the right questions
  • -Condition of external and public-facing capacity, like parking, sprinkler -systems, sewage, public access, and garbage removal
  • -Fixtures, paint, ceiling condition, and window integrity
  • -Accessibility features for wheelchair access, common areas, restrooms, lobby condition, emergency exits, and elevators and escalators 

Look for signs of wear and tear in each room and aspect of the space. Signs of water damage, mold, structure problems, building access, aging concrete, and even the condition of utility connections outside and around the building can be major headaches during the length of the lease. 

How to Conduct Your Own Inspection

Much like the previous section, you’ll want to take a careful look at the property during your walkthrough, but if you choose to conduct your own commercial property inspection, there are a few more things you should know.

First, you’ll want access to the property and time to be thorough. It’s unlikely that the property owner will allow you to dig deep without their own representative onsite, but having the opportunity to spend adequate time at the property without the pressures of someone over your shoulder will be invaluable. If you’re seriously considering a property, request an allotted time to walk through and have complete access to the property during the inspection. It’s important to take your time and be uninhibited from sales and marketing speech in order to get a clear, complete picture of the condition of the property. 

Second, taking meticulous notes and photos of anything that’s no up to par. That could mean missing paint, damage to the parking areas, signs of wiring issues or fixture damage, mold beneath sinks or in utility areas, or scuffs on flooring or walls. Not only will these allow you to demonstrate areas for improvement should you take custody of the property, it’ll give you leverage during the lease negotiation process. 

Finally, even if you don’t bring in a professional property inspector, it’s worthwhile to provide your findings (and documentation of damage) to a third party. That could be a trusted consultant, your commercial property broker, or a property attorney. If there’s something that looks off, but it outside your area of expertise (such as analyzing electrical or HVAC systems for integrity and condition), you should bring in an experienced commercial property inspector for a second opinion. 

How to Process Your Inspection Information – and What Comes Next

Once the inspection is complete, you’ll have all the information you need to start the lease negotiation process with the property owner or real estate manager – especially if you’re purchasing a property. By inspecting the details and potential shortcomings of a property, a lower sale price may make up for outdated utility systems and necessary repairs. 

In lease negotiations, your results can be viable leverage to improve your lease terms or convince ownership to make the needed repairs before you put ink on paper. Because issues with a property can negatively impact your finances and operations, it’s important to obtain a clear and comprehensive inspection before negotiations begin. 

No matter the direction you take, a building inspection gives you a clear picture of the quality and condition of the building so you can make a more informed decision about the rental or purchase before committing to a long-term solution. 

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How to Secure a Commercial Real Estate Loan and Tips to Get Approved Fast

Whether you’re looking to establish your first physical location or expand into a larger or additional space, you’ll likely need financing for a commercial real estate loan. Much like home mortgages or home equity line of credit, a commercial real estate loan can be used to make a purchase outright, fund needed improvements on a space you already own, or invest in specialized equipment to continue to grow your business.  Despite the nature of this loan, meant strictly for businesses, it resembles your typical residential mortgage in structure and terms, but is mostly dependent on a few key factors specific to your business. 

However, securing these types of loans can be difficult – and takes more effort than your typical, modern home loan. 

If you’re seeking a commercial real estate loan, there are several steps you need to take to even apply – let alone inform yourself on the ins and outs of the industry. Here’s what you need to know before getting started:

Explaining Commercial Real Estate Loans

Just as with residential real estate loans, not all commercial loans are created equal – or suit every business. Each loan type carries its own terms, rates, and approved usages. Before taking on a commercial real estate loan, you need to do your homework and find the right loan product for your needs.

Interest-only Loans

Interest-only loans, also known as balloon loans, are designed for businesses expecting a major financial windfall in the future. These types of loans carry a smaller interest rate with the expectation of a large final payment at the conclusion of the arrangement, which is typically between 3-7 years. 

Long-term Fixed-interest Mortgages

Most commercial real estate loans work in much the same way as a home mortgage loan, but with shorter terms. Commercial real estate loans rarely extend to 20 years compared to a home loan’s standard 30 year agreement and tend to sit between 5-10 years in length. There’s also a tougher credit score requirement, requiring business owners to have at least a 700 credit score, a demonstrated minimum of one year of success in business operation, and a 51% occupancy of the property in question. 

Refinance Loans

As with residential mortgages, companies can choose to apply for refinance loans to adjust their interest rates based on market conditions. While there are fees associated with this, companies looking toward the future can save in the long-term and accrue a smaller amount of debt over the lifetime of the loan. 

Hard Money Loans

Most business owners seek financing from traditional banks, but hard money loans come from private investors who may have other requirements and terms than FDIC-insured financial institutions. These loans tend to be based on the value of the commercial property and not by the credit scores or finances of the applicant. Hard money lenders want a quick return on investment, so don’t expect the lengthy repayment terms found at a traditional lender – nor the interest rates and upfront costs. 

Bridge Loans

A softer, more lenient version of a hard money loan that offers lower interest rates (typically between 6-9%), bridge loans provide better terms over a longer period. Approvals don’t take as long and funding comes much faster, but companies and business owners need to demonstrate exceptional credit scores and be able to demonstrate projected business growth as well as a 20% or greater down payment. 

Construction Loans

The upfront costs of land, material, and labor in a new construction are hefty, which is why a construction loan might make sense for companies looking to build and start fresh. These typically last between 18-36 months and end with a long-term mortgage once construction is complete. 

Blanket Loans

Blanket loans are designed for companies with multiple properties or plans to purchase them. These are common among franchises, small chains, and businesses with a viable need for multiple locations. These allow business owners to consolidate financing options for convenience and allow for sales of individual properties without fear of penalty against the loan’s arrangements. 

Applying for Commercial Real Estate Loans

Used primarily to either purchase or renovate a building, commercial real estate loans require that the property is owner-occupied, meaning that you can’t take out a commercial real estate loan if you’re leasing space. Because lenders consider the value of the physical property as collateral against the loan, you’ll need to actually own the building (or intend to purchase it) in order to secure the loan. 

However, there are some particulars and exceptions. If you’re sharing space with another business and own the building, you can take out a commercial real estate loan – but your primary business will need to occupy at least 51% of the space. 

Next, you’ll want to determine the type of commercial real estate loan you’ll need. This depends primarily on the type of business, the property itself, and your current and projected finances. 

What Commercial Real Estate Lenders Look for in Applicants

Before applying for a commercial real estate loan, you should inform yourself and your financial team about the requirements that a potential lender will expect during the application process. Here’s how to prepare:

Business Finances

While a commercial real estate loan may look like a residential mortgage or equity loan, the requirements are much more strict – and undergo more scrutiny. Because small businesses are more volatile and subject to more risk as a result of market conditions, the loan terms, and associated interest rates, may be higher than that of a more established company. 

Lenders will look at a company’s debt service coverage ratio, which analyzes a business’ annual net income versus the total annual debt. A ratio of 1.25 or better is standard. For example, should a company apply for a $1,000,000 commercial real estate loan, they’ll need to demonstrate the ability to generate a net annual income of at least $1,250,000. 

In addition, lenders will check your company’s business credit score to determine your ability to repay your loan and your previous history with debt and credit. Lower scores, as with personal credit scores, will determine the interest rate, payback period, and the required down payment. 

Most lenders require a FICO Small Business Scoring Service (SBSS) score of at least 140 – but there are exceptions for companies with collateral or higher personal credit scores. 

Personal Finances

There are multiple factors for small business owners to consider before applying for a commercial real estate loan, including each partners’ personal credit history and current scores. Businesses should take an honest accounting of stakeholders’ personal credit defaults, any foreclosures, liens, legal actions, and more before applying for a commercial real estate loan. 

Property and Collateral

In most commercial real estate loans, the property itself is treated as collateral. The lender attaches a lien to the property, giving them the ability to seize the building due to lack of payment. As mentioned above, these types of loans generally require the business to occupy at least 51% of the building. If that’s not in your company’s real estate equation, an investment property loan may be a better option.

As with most property-based loans, the terms are primarily based on credit score, net income, and property value. Lenders will allow potential borrowers a maximum value based on the loan-to-value (LTV) ratio and calculate the total loan based on that number. This is usually between 65-75%, which would mean your company must provide the remainder of that percentage as a down payment on the commercial real estate loan. 

How to Qualify for a Commercial Real Estate Loan and What to Expect from the Application Processing 

It’s no surprise that commercial real estate loans require a substantial amount of documentation. If you’re preparing for an application, you’ll need to meet – or exceed – the following threshold:

  • – Credit reports on all major stakeholders and the company itself
  • – Up to five years of tax tenures and financial records
  • – Projected finances throughout the life of the proposed loan
  • – Certification of corporation or LLC
  • – An independent appraisal of the property in question
  • – A complete business plan for the growth of the company, the use of the building and its benefits, and a breakdown of stakeholders’ qualifications and expertise.

Hard money lenders, and traditional lenders considering applicants with tight finances or poorer credit scores, will be more strict with borrowers. If your company has a subpar credit score or can’t secure funding from private or traditional lenders, here are some other options:

  • – Consider an SBA 504 or 7(a) loan, which is guaranteed by the U.S. Small – Business Administration
  • – Look into grants from non-profit organizations, local business development administrations, or SBA-issued grants
  • – Eliminate debt and improve your credit score
  • – Bring on additional investors or partners
  • – Consider personal or business collateral to demonstrate assets
  • – Look at private investment, angel investors, or a peer-to-peer lending group
  • – Offer lenders a larger down payment or higher interest rate

While commercial real estate loans are notoriously difficult to secure, being prepared for the application process at the outset – and bringing in your financial team and a commercial real estate broker – will go a long to demonstrate that your company has done its homework and is prepared to take on the financial burden of a monthly loan payment. 

Want to learn about your financing options? Check out Lendio. As a trusted partner of OfficeSpace.com, Lendio matches you to the best options and help you choose the small business loan that’s right for you. It’s that simple. No jargon or complicated processes. Get started now.

 

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A Guide to Commercial Real Estate Insurance for Your Business

In most major markets, commercial real estate leases in heavily-trafficked neighborhoods can explode a company’s monthly overhead. Besides the cost of the space itself, you may be on the hook for utilities, shared common area costs, security, supplies, and staff. But one cost that’s easily overlooked may be the most important: commercial property insurance.

For those in manufacturing, retail, and non-profits, this is a critical aspect in protecting your business from unforeseen accidents and incidents. While each industry (and the accompanying assets associated with each business) demand different costs for commercial property insurance, it’s important not to overlook this facet of commercial real estate leases. And as with auto or home insurance, it doesn’t hurt to shop around before securing a policy. 

Before you start your search for a suitable commercial property insurance policy, you should inform yourself with the ins and outs to ensure you know what to expect from your specific business requirements and to protect your company from undue burden.

Explaining the Basics of Commercial Property Insurance 

As with residential insurance, commercial property insurance covers a wide variety of danger and accidents, but it’s not a blanket protection. Most commercial property insurance policies cover common accidents, like theft, water damage, natural disasters, vandalism, and fires, but most importantly, these policies insure your property and resources within the building itself. In addition, they protect property your customers and employees bring into the store, signage, and branding items located within. However, it doesn’t protect you against lawsuits, so business owners should invest in general liability insurance to protect yourself against expensive legal fees related to your business. 

Who Should Secure Commercial Property Insurance?

Any business with a physical location should invest in commercial property insurance to protect the building itself, but even those who own their business and work from a home office should purchase commercial property insurance as well. 

Whether you have a commercial real estate lease or own the building outright (or are paying a mortgage), you’ll need commercial property insurance to cover the building. If you’re renting the property, the owner will transfer liability to you based on the square footage included in the lease. Before you can even sign a commercial real estate lease, you need to provide proof of commercial property insurance showing coverage amounts and the scope of the policy. 

Breaking Down Costs and Benefits

Depending on the value of your assets, including specialized equipment, computer systems, furniture, etc., your annual rate for commercial property insurance will differ. However, small businesses, such as coffee shops, boutique clothing stores, and bookstores, can expect to pay between $500-1000 per year. These rates are based on the construction materials of the building, distance to a local fire department station, and the nature of the business. Also, like residential property insurance, the rates will differ based on the value of the property and its contents- the larger your business, square footage, and the more valuable your assets, the higher your deductible will be.

To protect against accidental fires, water damage, flooding, and other natural disasters as well as man-made damages like vandalism and theft, commercial property insurance is an essential – and sometimes mandatory, as stated above – aspect of owning and operating a business of any size or scope. 

What’s Lessors Risk Insurance – and Why Does it Matter?

Lessors risk insurance is only applicable for building owners who maintain a minority of the property’s square footage and sublease the remaining area to other occupants. While building owners require commercial property insurance from tenants, lessors risk policies are an essential component of owning and operating a commercial building. These policies are less expensive than commercial property insurance, but still insure the property and its assets. 

What to Keep in Mind When Shopping for Commercial Property Insurance

As previously mentioned, commercial property insurance only covers certain aspects in the insurance world and shouldn’t be used as a blanket protection. If you’re about to start a business or open your first physical location, keep the following additional policies in mind to maximize your protection going forward:

Property Insurance

Whether you own the building you occupy or are leasing a space, you likely own several thousand dollars worth of business property, including computer systems, tools, equipment, and inventory to ensure continuity of business. Property insurance protects these assets against fires, theft, and other forms of damage. Optional features of these types of policies may also cover the loss of earnings as a result of incidents – which should be strongly considered by those seeking commercial property insurance policies. 

General Liability Insurance

This is the most basic and essential insurance policy in the commercial world, offering protections against damages and legal fees related to bodily harm or property damage to a third party on or off your company’s physical territory. General liability insurance is a crucial addition to commercial property insurance and should not be overlooked when considering a new facility for your company. 

Commercial Auto Insurance

For any company with vehicles under its name for employee use, commercial auto insurance is essential. Any vehicle that transports employees, assets, or proprietary information should be insured under these policies to protect against theft, accidents, and acts of God. Even if your company compensates employees for mileage and gasoline for their personal vehicles during business hours, you should invest in non-owned auto liability insurance in the event that an employee doesn’t have adequate insurance in the event of an incident. 

Business Owner’s Policies

These policies, otherwise known as BOPs, offer a bundle of business-related insurance policies, including business interruption, commercial auto, liability, crime/theft, and property insurance. Your rate will depend on your needs, but these are packaged to ensure business owners receive the best rate without having to invest in multiple policies from different providers. 

Professional Liability Insurance 

A professional liability insurance policy protects the company against any failure to render professional services – and isn’t included in a general liability insurance policy. Lawyers, accountants, consultants, and any other professional services provider should invest in this type of policy in addition to commercial property insurance. 

Data and Computer Systems Insurance

When a company collects privileged data, it has a legal responsibility to protect it. Should a data breach occur, this type of insurance would protect the company against damages and legal costs associated with any data loss, breach, or accidental disclosure of such information. 

Directors and Officers Insurance

This policy type protects employees at the highest levels of the company – C-level employees – against actions that could affect the profits of the company itself. Should their performance or actions while employed by the company demonstrate a legal risk or expose the company to a lawsuit, this policy would protect the company against damages and cover legal costs. 

No matter where you decide to set up shop, it’s important to factor in the costs of insuring your commercial real estate lease and property in order to protect your company from accidents, theft, and lawsuits – no matter your industry or area of focus.

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Explaining LEED-Certified Buildings – and Why You Should Consider Leasing Space in One

There are an infinite number of factors to consider when looking for office space. First and foremost, you’ll want a space that properly serves your employees and clients or customers now and into the future, but the secondary factors (parking, access, available utilities, etc.) can be incredibly important. But what most business owners don’t always place at the top of their “must-have” list is environmental factors – namely, LEED certification. 

LEED-certified buildings provide numerous benefits to building owners, tenants, and the communities they occupy. Here’s why you should consider seeking out a LEED-certified building for your next office space.

What LEED Certification Means – and Why It Matters

LEED, or Leadership in Energy and Environmental Design, is one of the most prominent green building rating systems in the world. Established in 1994 under the U.S. Green Building Council (USGBC), LEED is the industry standard for sustainability in materials, design, and construction, helping engineers, architects, landscapers, construction managers, and building owners establish a baseline for eco-friendly buildings and demonstrate progressive improvements beyond the bare minimum.

According to the USGBC, LEED-certified commercial buildings have returned over 80 million tons of waste from landfills across nearly 80,000 LEED-certified constructions around the world. 

Explaining the Differences Between LEED Certifications and Accreditations

There are four designations for LEED certification: Certified, Silver, Gold, and Platinum. These certification levels differ depending on a scoring metric that rates construction materials, design, utility capabilities, and renewable/reusable energy. Without getting too deep into the details, LEED buildings should be healthy for occupants and the environment in which they occupy. 

As for accreditation, LEED offers two different tiers for individuals seeking to build or design LEED-certified buildings: LEED Green Associates and LEED AP Credentials. LEED Green Associates hold professional expertise in environmentally-sound building practices, whereas LEED AP Credential holders have specialized knowledge of LEED principles across residential, commercial healthcare, education, interior design, and community planning. 

What Types of Buildings Can be LEED-Certified?

Any building owner can apply for LEED certification across five different categories: Building Design and Construction (BD+C), Interior Design and Construction (ID+C), Building Operations and Maintenance (O+M), Neighborhood Development (ND), and Homes (H). 

Building Design and Construction (BD+C)

Within BD+C, certified building designations contain an additional 10 LEED rating systems, which serve as guidelines for both new constructions and major remodels and renovations. Any type of building can apply for this designation, but due to the large scale of requirements across a broad spectrum of criteria, these certifications are among the most difficult to attain. 

Interior Design and Construction (ID+C)

Designed for tenants who occupy a certain portion of a commercial building, this certification is meant to encourage tenants to consider sustainable, non-infrastructure features during the buildout phase. These can include insulation, energy-efficient windows and doors, low-flow sinks and toilets, energy-friendly appliances, and reused or reclaimed building materials.

Building Operations and Maintenance (O+M)

Used by building owners and landlords to monitor and analyze maintenance, utility, and operations costs compared to LEED standards for environmental performance. Large-scale buildings and properties with multiple buildings on a campus (such as hospitals, schools, retail malls, and warehouses) fall into this category. 

Neighborhood Development (ND)

LEED-certified neighborhoods combine smart and sustainable growth, eco-friendly urban design, and green building principles for entire communities with a focus on the future. 

Homes (H)

Designed with single and multi-family homes in mind, but are limited to structures with three stories or fewer, LEED for Homes is based on the Environmental Protection Agency’s (EPA) Energy Star for Homes initiative. LEED-certified homes have energy-efficient heating and cooling systems, modern insulation and building materials, and incorporate energy-saving techniques like recycled rainwater, solar energy systems, and energy-saving solutions like smart lighting and thermostats. 

The Benefits of Leasing LEED Certified Buildings

There are clear benefits for building owners to build or renovate their properties to LEED certifications. From long-term savings in building materials, potential for tax rebates, lower utility costs, and less frequent maintenance requirements, there’s a lot to like in a LEED certified space. But what about the benefits for tenants? Why should a business seek space in a LEED building over the alternative?

1. Healthier, Cleaner, and More Productive

LEED buildings are designed to allow outdoor air into the building, improving indoor air quality and lowering dangerous Volatile Organic Compounds (VOCs) in office spaces. This limits allergens, dust, and pollutants from entering your workspace – which means healthier, happier employees. 

An EPA study has shown that Americans tend to spend about 90% of their time indoors, which has shown to make a significant impact on the health, productivity, and performance of an individual. Certain features in LEED-certified buildings can boost employee productivity, such as mindful lighting designs, fitness centers, relaxation and meditation rooms, natural lighting and features, and improved access to outdoor spaces and views. In fact, a recent study by the USGBC shows that 85% of employees say that access to sunlight and outdoor spaces boosts their workplace happiness. 

2. Reduced Utility Costs

LEED buildings are much more energy efficient than buildings without these standards. Designed to utilize less electricity and water, LEED buildings offer tenants significant savings in operational and utility costs over the lifespan of your commercial real estate lease, but some can even provide immediate savings on utility costs thanks to renewable and smart utility systems. 

3. Potential for Tax Benefits

Depending on your location, LEED-certified buildings can provide occupants tax rebates in addition to zoning allowances. Meant to promote green activities, governments on the local, state, and federal level sometimes offer tax incentives for those companies who choose a LEED building over a non-certified property. 

4. Eco-Friendly Brand Recognition

There’s a definite bragging right to occupying, building, or owning a LEED-certified building. From the government to investors, customers to clients, and media to passersby, showing the world that your company is mindful of its environmental footprint is an easy PR win that will save you money. 

Not only are LEED-certified buildings environmentally-friendly and offer companies cost-saving opportunities, but they’re becoming more and more sought after in commercial real estate. For property owners, the process to become certified is costly and time-consuming, but offer significant upside after the initial investment. For tenants, it’s a sign to the world that your company has taken steps to minimize its environmental footprint. Over the life of the building or the commercial lease agreement, it’s good for everyone’s pocketbooks, too.

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How to Gain More Flexibility in Long-Term Commercial Real Estate Leases

For most businesses, agreeing to a long-term financial commitment is only positive if it means additional and sustained income. But a commercial real estate agreement is the opposite – a monthly expense that needs to be paid in order to keep the lights on. 

Spanning anywhere between 3-20 years, a commercial real estate lease agreement is a significant investment. While most leases include clauses for early termination (for a fee), it’s important that companies pursue the greatest amount of flexibility in a long-term real estate commitment to protect themselves from changing market and economic factors. 

Why Landlords Refuse Short-Term Lease Agreements

Despite the fact that most companies can’t accurately predict business cycles further than 2-5 years, property owners always seek a longer lease term in order to maximize the value of their real estate asset and secure a predictable cash flow. 

There’s also the financial burden of taking on a new tenant. Taking into account cleanup costs, architectural fees for new buildouts, and landlord improvements to make the space suitable for a new tenant, it doesn’t make financial sense to commit an upfront investment for a short-term tenant. 

Exploring the Different Options in the Lease Negotiation Phase

Established businesses with long-term projected growth and prosperity can benefit from longer lease terms, which tend to offer more agreeable monthly terms, additional perks, and more generous tenant improvement allowances. But there’s always a chance that things will change, which is why you’ll want to protect your company’s interests with the following conditions during the lease negotiation phase:

Right to Assignment and Sublets

In the event of a rapid expansion, merger, acquisition, or if the absolute perfect property comes onto the market midway through your lease agreement, having a right to assignment (in which the original tenant would assume responsibility for a sub tenant) or sublet (where the landlord assumes responsibility for a sub tenant) clause in your contract will allow you to sublet the property to another company without breaking the terms of your lease agreement. 

Renewals and Extensions

Renewals and rights to extensions built into your lease agreement allow you flexibility in retaining a space after the term of your lease expires. Due to the hefty costs of relocating, not to mention the logistical nightmares of moving offices and maintaining continuity of business, it makes more sense to provide yourself the ability to keep the same space. Even if the market demonstrates more favorable properties, your landlord is always seeking more attractive tenants with deeper pocketbooks. After all, if it isn’t broken, don’t fix it. 

Early Terminations and Contractions

Early termination options give tenants the ability to end their lease agreement after a certain point, but requires them to give the landlord written notice in advance of the termination date – usually between 6-12 months. But these termination clauses won’t come without a cost. Landlords will demand, at a minimum, a certain percentage of the remainder of the lease and for leasing commissions and tenant improvement allowances. 

Contraction clauses allow companies to downsize their square footage in advance of the conclusion of their lease agreement. This allows companies to pare down their occupancy in the event of layoffs, changing market conditions, or in preparation of moving a company to another more suitable location. 

Flexibility in Expansions

Every business hopes to grow and expand their operations. In the hopes that it happens, it’s important to anticipate a growing staff over the course of a long-term commercial lease agreement and avoid stacking desks atop one another. Building owners usually grant a certain version of an expansion option to tenants, which are commonly chosen from the following:

Right of First Offer

Including a “right of first offer” clause in your commercial lease agreement mandates that the landlord must present a newly available space or expansion to the tenant before putting it on the market to third-parties, allowing tenants the ability to expand their square footage under the same roof. 

First Right of Refusal

This clause requires landlords and building owners to provide the same deal made with a potential third-party tenant to the current tenant for equal space. Triggering this clause would preempt any third-party deal and allow the current tenant to expand into the space advertised for the same terms agreed upon by the landlord and the third-party. 

Fixed Expansion Options

Also known as hold options, these stipulate that a tenant has a predefined amount of time to exercise an option on an adjacent or neighboring space once it becomes available before the landlord places it on the market for third-party availability. 

Other Alternatives to Space-Related Issues

Thanks to the democratization of the workplace and the reach of connected business communication systems, companies have begun holding off on an expansion of office space in return for flexible working conditions, shifting employees to remote or work-from-home situations to avoid overcrowding and in order to save money on expansions. 

Temporary or shared office solutions have also been a major advantage for companies with space shortages. Monthly plans through shared office providers give companies the ability to remain in contact with their employees, give them adequate desk space, and even schedule meetings in these shared conference rooms. For companies with space requirements or looking ahead to a major expansion, these short-term alternatives can prove invaluable to businesses on the move. 

Negotiating for more flexibility in your lease agreement can be a major hurdle in the process, but protecting your company’s interests in the long-term makes the effort well worthwhile. When you sit down with the landlord’s representatives, try and incorporate some of the above options in order to limit your risks and protect your company against uncertain market conditions and unforeseeable economic circumstances. 

 

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The Final Steps of the Lease Process: What to Expect After Submitting Your LOI

No matter your industry or area of business, you know one thing by now: a deal isn’t done until the ink is dry. If you’re working toward a new office space, the complexity involved in exploring, touring, negotiating, and finally getting to the point of making a decision is unmatched. Whether you’re relocating, expanding, renewing an existing lease, or making a major redesign of your current home, your broker has taken every step toward offering the best terms on your behalf based on market conditions and your company’s leverage against a landlord. Now’s the time to complete the deal and get things finalized. 

For most commercial real estate transactions, you’ll want to work through a commercial real estate broker to help facilitate the search and negotiation process before presenting a letter of intent (LOI) to the landlord, which should be the final step before signing a contract on a new space. But there’s much to know about the murky middle ground between an LOI and putting pen to paper. 

Next Steps: Finalizing the Leasing Process

There are several steps you’ll need to perform before signing any legally-binding documentation related to leasing a commercial real estate space. Here’s where to start:

Preparing Your Lease Documentation

You’ll want to ensure your financials, business plan, and leasing documentation is secure and finalized before submitting a letter of intent and moving forward with the leasing process. There are multiple factors included in this, not limited to:

Letter of Intent

While it’s not a legally binding agreement, signing a letter of intent shows both parties that you’re tentatively agreed upon specific lease terms and ready to move forward in the leasing process. 

Lease Documentation 

Having a legal professional experienced in the commercial real estate world is a critical aspect of any lease agreement negotiation. Before signing anything that could be seen as legally binding, you’ll want your own legal counsel to review and negotiate any potential pitfalls on your behalf. Even when terms, clauses, or amendments are proposed on either side, you’ll want counsel to review the entire document for changes before making a decision. 

As a tenant, your counsel’s responsibility will be focused around mitigating risk. Whether it’s during the negotiation phase, throughout the length of the lease agreement, or upon exiting or amending an existing agreement, you’ll want to bring in legal help to ensure your interests are accounted for. Adding to clauses, amending, deleting or removing, or renegotiating existing clauses are standard for the lease negotiation process, as are negotiating toward step-down clauses.

Step-down clauses can be a common ground between difficult or restrictive clauses on the part of the tenant and protecting the landlord’s interests. For instance, some lease agreements, especially if the tenant is a small business with an unproven track record over a long period of time, require personal liability guarantees, but this requirement is commonly negotiated down to a certain maximum dollar amount during a set period of time. 

Design/Buildout Specifications

  • Development, Approval, and Request for Proposal (RFP)

Before moving forward on any changes to the property, you’ll want to source a talented and capable project manager and designer. Once the design plans are underway, you’ll want to inform this team on the goals and desired outcomes of your project. 

Outside of any structural changes you’ll be needing, you should document and assess furniture, finishings, and minor touches to present the final costs to the landlord and city authorities and obtain permits necessary to complete the construction itself. 

Finally, you’ll want to start the bidding process to secure contractors. The more detailed you are in the scope, goals, materials needed, and finishes you can provide, the more accurate your potential contractors will be in their bidding process and therefore help you avoid headaches down the road. 

  • Bid Review and Analysis

Once you’ve submitted documentation to contractors, permitting authorities, and the landlord, you’ll want to organize a bid review team in order to analyze and weigh each bid before making a final decision. Before this process begins, however, it’s helpful to agree on an internal criteria for bids to streamline the decision-making process. Everything from timeline to budget should be on the table, but the finer details regarding subcontractors, liability insurance, and permitting need to be included in the conversation. 

  • Contract Administration and Tenant Improvement

Now comes the time to approve and finalize all contractors, subcontractors, suppliers, and bids. You’ll want to keep a close eye on their progress to avoid unforeseen overruns and delays, so building in a regularly scheduled meeting with all stakeholders is a good idea to ensure things run smoothly. 

Lastly, holding tenant improvement quality/cost control audits throughout the build out process will help your team ensure your goals are met within budget and in a timely manner. 

  • Project Completion and Tenant Occupation

The final stage of the process involves overseeing final details, navigating bureaucracies, managing close-out inspections, and signing off on the new construction. You’ll want to secure a Code of Compliance certificate, run a cost reporting analysis for the project, and audit the total budget of the project compared to the bid. A contractor’s defect liability will only last so long, so checking to ensure the project has reached its completion with all of your goals achieved, it’s time to do a final inspection and ensure the work is completed. 

With legally-binding agreements as complex as a commercial real estate lease agreement, it’s common to experience residual issues relating to the deal long after the paperwork is signed. That’s why it’s  important to keep your team on-task and focused on achieving your common goal – and keeping your tenant broker and legal team abreast of any developments before, during, and after the ink is dry. 

 

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Office Building Classes and What You Need to Know

Anyone who’s had a few different homes throughout their life knows there’s a difference between a college dorm and a 5 bedroom estate in the suburbs. The same is true for office spaces. But when searching for new office space, your time and attention is limited, making it important to know more than pictures can show.

Of course, anyone knows a luxury or high-end building when they see it, but real estate professionals take a different standard when rating their top prospects, which come in four different office building classifications: Class A+, Class A, Class B, and Class C.

While it’s easy to distinguish between the quality of these properties based on the traditional grading system, it’s important to remember that determining these distinctions is more of an art than an exact science.

What are the Different Office Building Classes and How are They Determined?

As we mentioned above, there are four classes of rating systems for commercial real estate listings. Before we dive into the differences between the different classifications, let’s take a minute to discuss the factors involved in establishing them:

How are Building Classes Determined?

There are multiple factors that help real estate professionals determine the class of an office building they need to categorize before the listing can go forward. But it’s also important to remember that there are no industry guidelines for building classification. In fact, BOMA (Building Owners and Managers Association) generally resists the publication of building classifications for specific properties, though most real estate professionals base their judgement on current market availability and comparisons to similarly sized properties above all else.

Other characteristics include, but are not limited to:

Building construction material quality and age
Finishing materials and design
Maintenance and upkeep
Capacity of essential services for current and future growth (HVAC, electrical, Internet, maintenance, upkeep, elevator, lobby, power backup, parking, and common area spaces)
Access to major freeways or public transportation
Security
Ceiling height
Location
Construction and common area improvements (either current or ongoing)
Amenities and secondary features (cafes, day care, cafeterias, dry cleaning, copy and mail services, fitness centers, etc.)

Explaining the Differences Between the Classifications

The four rating classifications for office buildings help potential tenants, landlords, investors, and real estate brokers easily compare buildings within a certain market, but they don’t provide a global rating for comparative building spaces. For example, there’s a considerable difference between a Class A building in Boise, Idaho and Manhattan. That’s why it’s important to remember that these properties are rated relative to comparable markets rather than a larger scale, where they may not hold relevance.

Class A+

As you might imagine, Class A+ buildings are the cream of the crop in the commercial real estate market. They offer the finest available materials, best building standards, greatest array of facilities and amenities, easily accessible transportation, prime locations, and stunning views. These properties are typically few and far between, expensive, and highly sought after within their specific markets.

Also referred to as “trophy buildings,” these properties are unique in their technology, design, or sheer prestige. Sears Tower in Chicago, the Empire State Building in New York, or One World Trade Center in Lower Manhattan are examples of Class A+ buildings in the United States.

Class A+ tenants can expect a greater allocation for onsite parking for both clients and employees, on-site cafes, restaurants, banking services, mail facilities, gyms, spas, communal areas, daycares, and more.

Class A

Class A buildings are known for their proximity to central business districts in their markets, often competing for high-level tenants with global name recognition. They tend to have high occupancy rates, few tenants with greater space or floor needs, and top-notch amenities few businesses can afford.

Restaurants, cafes, fitness centers, spas, atriums, day cares, and even retail shopping within the lobby floor are common in Class A buildings. But with no expenses spared, there’s a good chance a Class A building will also be adorned with tasteful decor, modern interior design aesthetics, and high ceilings with employee-friendly overhead lighting. For most markets, these properties are the best of the best and they deserve the higher costs associated with occupying (and enjoying) them.

Class B

Class B buildings tend to be within 10-20 years behind the most current developments in a specific marketplace, perhaps offering similar amenities, but suffer by comparison. Their maintenance, HVAC, and electrical capabilities may not be up to par in terms of current standards, as would the fiber optic and communications infrastructure, but still offer a valuable, competitive office space for most high-to-mid level clientele.

These facilities are routinely updated, improved, and remodeled to tenant expectations, making them an excellent value for potential tenants looking to impress their employees and clients without taking on a Class A-level commercial lease agreement.

Class B buildings are often located off Main Street, offer fewer security and parking opportunities, and require more routine construction and maintenance than a Class A building, but are functional, attractive, and capable of housing modern businesses of any stripe.

Class C

While there are no “Class D” or “Class F” buildings in commercial real estate, Class C tends to scrape each of the latter categories into one. Class C buildings are older (at least 20 years old) and are well-worn.

Multiple tenants over multiple decades have occupied each space, leaving the wear and tear that comes with generations of business taking its toll. They also lack modern expectations of lobby attendants, security, and concierge services, making them less attractive than modern constructions that have these amenities as standard items.

Any building lacking elevator services, lobby personnel, on-site parking, or HVAC will generally earn a Class C rating sight unseen. But for small businesses that rely on low overhead and competitive lease terms, Class C spaces can provide a great jumping off point for those just getting started.

What Potential Tenants Should Expect When Considering Different Office Space Classes

Competing for high class commercial real estate is important for companies seeking popularity on the street level, high visibility in major cities, and those servicing boutique clientele, but there’s an important aspect to keep in mind: these classifications are subjective and don’t always reflect the quality of service a company provides.

When searching for a potential new commercial real estate space, it’s important to consider your specific needs above all else. Classifications are secondary; the property’s capabilities in servicing your company’s specific needs should be considered above all else. While companies in legal, investment, or luxury industries should seek out higher class real estate to attract higher paying clients, most should focus on their overhead, a property’s amenities, and servicing both employees and clients to the best of its ability.

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Understanding the Differences between Usable, Rentable, and Common Area Square Footage

Commercial real estate listings are, if anything, designed to be flashy and attractive. That means professional photography, easy-to-read bullet points, and – most prominently – total square footage. But landlords use a formula to calculate a tenant’s total rental rate that combines the listed square footage with how much space they’ll use in common and shared areas throughout the building – and that can be confusing for tenants looking to save as much as possible on their commercial real estate leases.

Before you commit to a lease agreement, you’ll want to understand the following terms: usable square footage, rentable square footage, and Common Area Factors. Knowing which is included in your lease can save you a considerable amount of money during the lifespan of your agreement and help you avoid paying for square footage you may actually never see – let alone utilize.

Usable vs. Rentable Square Footage

Usable square footage (USF) is defined as the total square footage a tenant occupies. Depending on the size of the tenant’s lease (square footage and number of floors occupied), the usable square footage may include restrooms, maintenance areas, and elevators across several floors. More commonly, any recessed sections or support columns are considered non-existent when landlords calculate usable square footage.

Rentable square footage (RSF) encompasses the usable square footage, plus a portion of the building’s common area. RSF is calculated by multiplying the lease rate per square foot by the listed square footage plus a percentage of all the shared or common areas in the building. While this includes areas your company will have access to like restrooms, cafeterias, elevators, stairwells, and lobbies, you’ll also be contributing to maintenance, building storage, and janitorial closets.

Common Area Factor

Common Area Factors, or add-on or load factors, are an increase in rentable square footage above usable square footage. Tenants share a percentage of the costs of shared areas throughout the building. These can include fitness areas, parking garages, utility rooms, cafeterias, restrooms, elevators, stairwells, storage and maintenance areas, lobby space, and communal areas like break rooms and even rooftop terraces or balconies.

Measuring Square Footage and Calculating the Differences

Usable Square Footage

This is the easiest to decipher, but more rare than the other types. It includes the actual square footage that your business occupies.

Measuring usable square footage is fairly straightforward. For a rectangular space, simply multiply the length of the room by the width. This can easily be done with a tape measure.

For more irregularly-shaped spaces (such as an L-shaped or divided space), dividing rooms by rectangular or triangular shapes and adding the multiple sums together will provide a more detailed account of total usable square footage in a commercial office space.

Rentable Square Footage

Standard tenants that don’t occupy multiple floors or an entire floor can calculate rentable square footage by adding the shared floor and building common factor to the rentable square footage, like this:

Usable Square Footage x (1 + add on expense percentages) = Rentable Square Footage

For example, if you’re trying to determine how much you’ll pay each month for a 4,000 square foot property at a market value of $1.75 per square foot, you’ll want to use the following formula:

Market Price per sq. ft. x RSF = Total Monthly Rent

In this example, you’d be paying $1.75 for each of the 4,000 square feet:

$1.75 x 4,000 = $7,000 per month

Common Area Factor (or Load Factor)

Common Area Factor, load factor, add-on factor, or core factors are examples of the common area space you’ll pay for while you occupy space in a commercial building. Landlords add all of the rentable space throughout the building (even elevator shafts, stairways, maintenance areas, and utility rooms), then subtract the total space contained within tenant leases to arrive at a shared common area between all tenants.

Calculating the load factor is relatively simple. Start by finding all the usable (USF) and rentable square footage (RSF) throughout the building, then divide RSF by USF to determine the load factor.

What’s a Loss Factor?

Loss factor in commercial real estate is the percentage difference between rentable areas within a building that tenants pay for and the usable area throughout the building.

When landlords advertise available real estate listings, they’ll often factor in the common area factor in their square footage disclaimer. For example, if your desired space is listed at 2,500 square feet with a 13% load/loss factor, your actual usable space will be 2,212 square feet.

How Do You Pay for Common Areas?

Your office space is more than the square footage you occupy. After all, having a lobby, elevators, cafeteria, stairwells, and restrooms do cost money.

Most commercial real estate lease agreements have some sort of common area factor built into the legalese, but some landlords institute a common area expense stipend on top of monthly rent and utilities.

What are BOMA Standards?

The Building Owners and Managers Association (BOMA) provides the real estate industry an easily understood floor measurement standard for office buildings. Updated in 2017, the BOMA 2017 for Office Buildings: Standard Methods of Measurement offers landlords and brokers a mutual understanding on how – and why – certain shared or common areas are calculated into load factors.

Changes from the previous guide include calculations for:

  • Outdoor/patio/rooftop spaces
  • Fitness centers
  • Conference centers
  • Updated allocations for amenity and service areas based on tenant usage
  • Capped load factors may be applied on a tenant-by-tenant basis

When searching for new office space and comparing potential properties, considering the differences in USF, RSF, and common area factors in each lease can make a major impact on your bottom line. Depending on the number of amenities and your needed uses in a potential property, breaking down the different types of Common Area Factors between commercial real estate opportunities and how they add or detract from the value of the space itself. That’s why it’s so important to work with your tenant representation broker to ensure your team gets a detailed breakdown of each property’s cost/risk analysis.