Leasing office space is a big decision, and generally a long term commitment. You want to make the right choice—after all, it can involve a significant amount of money for your business, and it will be you and your employees’ second home for the foreseeable future.
Making a good decision starts by knowing how to understand an office lease. You will probably want to have a real estate lawyer go over all provisions with you, but as the future tenant, you will want to have a general understanding of what the lease clauses mean for your own education and well being.
- Full service, gross vs. net lease
- Specifications of space you are renting
- Who’s responsible for maintenance
- Tenant improvements (TI)
- Rules for placing signs
- Exclusivity clause
- Renewal options
You and your attorney should pay close attention to these points, so you can avoid frustrations in taking this important step for your company.
- Know the difference between a full service, gross and net lease.
In a full service lease, the tenant pays a quoted price that covers taxes, insurance, common area maintenance (CAM), utilities and janitorial services. The tenant is responsible for increases in operating expenses each year.
In a gross lease, the tenant pays a quoted price that covers taxes, insurance, common area maintenance (CAM), utilities and janitorial services. The rent escalates by a set amount each year of the lease, which covers increases in operating expenses. In a gross lease, the risk of higher-than-anticipated increases in operating expenses is transferred from the tenant to the landlord.
With a net lease, the tenant’s base rent covers all expenses except electric and janitorial services, which the tenant pays directly.
There are also other types of leases, including Triple Net leases (NNN) and modified gross leases.
Make sure your lawyer is thorough in his or her inspection of the lease and you understand who is responsible for what expenses, so you are not surprised by any unanticipated costs.
- Note escalations.
In simple terms, escalations are permissible increases in rent over time. You will want to know how these increases are going to be calculated, and be sure you are willing to pay them in the future.
- Determine exactly what space you are renting.
You want to rent an “office space,” but do you know exactly what you are getting? Are you also renting the bathrooms, hallways, and elevators? Ask your potential landlord how he or she measures the office space versus common areas and what other spaces are included with your lease.
- Find out who’s responsible for maintenance.
You need to know who will oversee repairs or upkeep to your new office space. Who handles the heating and air conditioning of the space? You will want to know how responsive the property management team is and who you can call when you have a problem.
- Determine your tenant improvements (TI) allowance.
While you may love the general office space, you very well may need to add additional workstations or offices and make other changes to the space to address your particular needs. Find out if your landlord can make these changes for you and if he or she is willing to contribute to the costs of alterations.
- Don’t overlook signage opportunities and clauses.
This is where paying attention to the details really counts! You may really want a company sign on the exterior of the building, but your lease may not provide you that benefit. Check your lease for clauses that allow, prohibit or restrict exterior signage opportunities.
- Determine whether an Exclusivity Clause is a positive or a negative.
This clause will prohibit your landlord from renting space in the same building to one of your competitors. In some industries, there can be benefits to being in a collaborative environment with others in your industry, so you might actually want to be in the same building with other companies like yours. In other cases, you may want to add it to your lease.
- Know your renewal options.
If you’re just starting to lease office space, you may want to consider a lease with renewal options. It may be better to sign a lease with a shorter length and renewal options than to commit to a ten-year lease from the get-go.
Going over your lease in detail is a crucial part of the office space search process. Having done so, you will feel much more confident in the space you have chosen for you, your employees, and your business.