[ by Justin Lee, The SquareFoot ]
Finding office space in Austin, TX, or anywhere else can be complicated. It isn’t like looking for an apartment to rent or a house to buy. Prospective tenants—particularly less-experienced startups—must consider many variables, and they can get into deep financial trouble if they don’t comprehend them.
Here’s a look at four important aspects of renting office space that must be understood before starting an office search.
1. Calculating Office Rent
You’d be surprised at how many prospective office tenants are driving around town, calling phone numbers they see, touring spaces and even initiating lease negotiations without clearly understanding what they’ll be paying for and how much the rent will be.
The three main terms a prospective tenant needs to understand are usable square footage, common area factor and rentable square footage. Here’s a look at each one.
Usable square footage: This is the amount of space that actually will be used by a tenant. It’s also known as “carpetable” square footage.
Common area factor: This is a percentage of shared space within a multitenant building that a tenant will pay for beyond the usable square footage. This common space can include restrooms, kitchens and hallways.
Rentable square footage: This is the sum of the usable square footage and the portion of common-area space that a tenant must pay for.
Once you understand what it is you’re paying for, it’s crucial to understand what a quoted rental rate is and how it’s calculated. Traditional office rent usually is quoted as a monthly or annual cost per rentable square foot. Rent for temporary office space like executive suites typically is quoted as a total monthly cost.
2. Understanding Commercial Real Estate Roles
Four players usually are involved in a commercial real estate lease: the tenant, the tenant broker, the landlord, and a landlord agent or listing broker. The tenant is the person or legal entity signing the lease. The tenant broker represents a prospective tenant in the search for office space. The landlord owns the property. A landlord agent or listing broker markets and leases office space on behalf of the landlord.
Typically, small businesses seeking space will deal directly with the landlord. Midsize to large businesses or more specialized tenants might hire a tenant broker to help identify options and negotiate the lease terms. Tenant brokers usually receive 4 percent to 5 percent of the gross value of the rent over the life of the lease. Normally, the landlord agent also gets a commission.
3. Knowing the Must-Ask Questions
Searching for space isn’t just about touring several offices and picking the one that looks the best for the price. A prospect tenant should ask several questions while looking at potential spaces:
- What are the building hours?
- When was the building constructed?
- Do individual suites have their own conference areas, or are there shared facilities for all tenants to use?
- Is on-site parking available? Is it reserved or open? How does it cost?
- How is the air conditioning controlled?
- What are the current year’s estimated operating expenses, and how are they passed on to each tenant?
- Is there an option to expand into more space in the middle of the lease term?
- How are maintenance issues handled, and who’s the maintenance contact? Is maintenance located on-site?
- When and where is rent paid each month? Do you charge a late fee?
4. Grasping Lingo in a Commercial Real Estate Lease
Here are nine words or phrases that are common in commercial real estate leases:
Term: Length of the lease agreement, typically listed in months.
Base rent: Core component of the overall cost of renting space. Can be fixed throughout the term or can increase each year by an agreed-upon percentage.
Rent: Base rent plus other costs like maintenance.
Option: Right that lets a tenant extend the lease under agreed-upon circumstances.
Concessions: Free rent, parking, signage and other incentives a landlord might offer to entice a prospect to sign a long-term lease.
Tenant improvement allowance: Amount a landlord is willing to pay out of pocket for modifications to the space, such as paint, carpet and doors.
Deposit: Initial payment required before the lease starts. Returned at the end of the lease unless damage occurs or money is owed to the landlord.
Rent commencement date: Date when the lease takes effect and the initial rent period begins.
Lease expiration date: Last day that a tenant can occupy space.