Once you’ve located your ideal space (after a lengthy search, tour, and negotiation process), the real work begins. Moving, logistics, and continuity of business are your prime concerns, but there’s more you should consider before signing the lease and securing the keys.
Hopefully, you’ve been transparent about the amount of monthly rent your company can afford, taking into account average utility costs as your business grows and you add to your headcount. That line item for rent may not be what it seems, though. Hidden or obfuscated costs of leasing an office space can cripple a young business’ budget, leaving you on the hook for an extra chunk of change that may not have been clearly communicated to you during the negotiation process.
Commonly Overlooked Office Space Costs
Aside from your monthly rent, taxes, and overhead costs, the following factors can easily sneak up on a business – and that’s frustrating for those who want to carefully and predictably budget for charges.
- Property Taxes
- Increase in Operating Expenses
- Pre-existing Conditions
- Utility Surveys
- Personal Guarantee Clauses
- Kitchen Buildout
Changing regulations, deteriorating conditions, and so-called “acts of god” do occur in the commercial real estate world, making it necessary to make improvements on a property to ensure smooth and continued use. Anything between aging HVAC systems to rusting sprinkler systems and subpar ADA-compliant facilities can set a business owner back thousands and thousands of dollars, so ensuring your lease agreement has clear definitions about who’s responsible for needed upgrades is a wise move for a company of any size.
Most commercial real estate leases come with a built-in agreement for utility costs and who’s responsible for them. However, some aren’t as clear on paper as others, leaving you liable for snow removal, sidewalk maintenance, parking lot repaving, and general upkeep. If a maintenance plan isn’t clearly spelled out in your lease agreement, you should inquire about the liability for general maintenance throughout the life of your lease before you put ink to paper.
Again, based on the structure of your lease agreement, you may be liable for a portion of your space’s property taxes and any increases that may come in subsequent years. Most agreements divvy up the percentage of property tax contributions by the amount of space a tenant is occupying, but if you’re the sole tenant in a building, your landlord may not be as transparent in your contribution – and that’s a hefty bill to cough up on a property your company doesn’t own.
Increase in Operating Expenses
Common commercial real estate leases allow wiggle room for landlords to increase monthly rent by an incremental percentage each year, factoring in the costs of maintaining the building, employing common area staff and maintenance crew, and repairing equipment as needed – which is all understandable. But the dangers for tenants come into play when caps on annual rent increases are ignored or excised from lease agreements, meaning you may be on the hook for a much more expensive space than you originally agreed upon – or looking for a new home when the increases take effect.
Businesses experiencing rapid growth spurts need flexibility in their available office spaces, making long-term leases a tough pill to swallow. But something to consider when changing office space are pre-existing condition clauses, which require you to return the property to its original condition once you’ve vacated – and that can be difficult for those with build-out requirements or specialized equipment needs. Any new additions, upgrades, or aesthetic alterations will need to be stripped out or you’ll be sitting with a larger move-out bill than you might expect.
Lease agreements can sometimes include clauses allowing landlords or property owners the ability to order utility surveys of an office space, charting how much electrical, water, and – thanks to data caps – the amount of Internet/data each suite or office uses. As a result of these surveys, landlords are able to increase utility contributions to their tenants.
Some surveyors will factor in the total wattage of all your equipment running at full throttle, however. Unless you’re leaving everything at full capacity outside of working or business hours, that’s an unfair cost to take on. You should carefully consider any utility survey clauses in your lease agreement and ask to have your own third-party surveyor double-check any work done in your space for confirmation before ponying up more cash.
Personal Guarantee Clauses
If you’re a first-time commercial renter, sometimes landlords will require tenants to sign a personal guarantee to cover the cost of the lease should the business go under before your term is up. If you’re on the hook for a $1,200 per month lease agreement over two years, you’ll need to ensure the full $28,800 is covered – or else it could come right out of your own pocket.
Most lease agreements don’t come with equipment or furniture stipends (and, if they did, you’d likely be better off buying that gear on your own, anyway). You’ll need to factor in the additional space with reception/waiting/welcome areas, work spaces and seating, shared meeting/break areas, and decor. It might mean a few trips to Ikea or a special order from an office equipment provider, but it’s a major cost that you need to take into account if you want your new space to feel like home.
Likewise, most office spaces without shared kitchen areas will need to consider the cost of bringing a working kitchen up to par. Appliances are easy to source and have installed, but building out cabinets and sinks will require much more effort, time, and money.
How to Prepare for Unforeseen Costs
The best way to catch unforeseen costs before they bite you in the wallet is to take a long, cautious look at the terms of your commercial real estate lease agreement and have your legal representative negotiate questionable or unwanted clauses on your behalf. While this is easier said than done, it’s important to carefully and descriptively communicate your desired outcome with your representative before the negotiation process even begins. Costs of negotiations can come up and any additional back-and-forths you have with the landlord may delay your desired move-in date and put you in a bind for upgrades, move-in dates, and continuity of business, so being as upfront in the initial process is essential to keeping costs low.
Preparing for an office move is a major step in the life of a business, but rushing into a lease agreement without analyzing the terms of the lease could leave you shackled with a much higher monthly overhead cost than you initially expected. With this guide, you should be prepared to take a hard look at any agreement with your real estate representative and help avoid unwanted or unforeseen office space costs into the future.