Tips for Assessing the Cost of the Commercial Rental
The true cost of a business rental is not always the monthly rent.
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Once you've found space for your business that looks promising and worth pursuing, it's time to figure out the true cost of the rental. You might ask, isn't the monthly rent all you need to know? Unfortunately, it's not that simple. For starters, with commercial space, the monthly rent can be a complicated figure, composed of various factors and calculated in downright Byzantine ways. And there are other expenses, which may not be called rent, but nevertheless feel like rent when you pay them on a regular basis. On the positive side, if you're lucky, there may even be some savings -- like free rent for the first month or two -- that should be taken into account.
There are at least two important reasons to determine the true cost of leasing a given space. First, you need to make sure that the cost fits your budget. Second, if you're comparing two or three different spaces, you need to know the true cost of each space if your comparisons are to mean anything. Once you understand how a prospective landlord measured the space and what kind of rent computation you're being offered, you'll be ready to roughly compare the rental costs for two or more places you're considering.
The following tips cover important steps to take determine the true cost of the rental.
1. Determine how the landlord has measured the square feet. Commercial space is often advertised and rented on a cost-per-square-foot basis, rather than a descriptive basis (such as "the first floor"). For example, an ad might describe space as "2,000-Square-Foot Office Suite in New Building" or "2,000 Square Feet of Prime Retail Space." However, 2,000 square feet doesn't always mean that you'll pay for and occupy exactly 2,000 square feet.
Strange as it may seem, many landlords -- especially in office buildings -- take their measurements from the middle or even the outside of exterior walls. It's a bit like the butcher who charges you for the bone and fat as well as the edible portion of the steak. Obviously, if a landlord uses this method of measurement, you'll wind up paying not only for usable space but also for some or all of the thickness of the walls.
2. Determine whether and how much you'll be paying for common areas. In many buildings, there are parts of the structure or grounds that you'll share with other tenants. For example, you and other tenants may share lobbies, hallways, elevator shafts, bathrooms, and parking lots. When you add these spaces up, they can amount to a hefty chunk of the property. Don't assume that the landlord is going to let you use these shared facilities for free.
3. Don't discount the importance of the layout. The way that a space is laid out -- not just its size -- will have a lot to do with whether you're getting your money's worth. For example, awkward angles, interrupted workspaces, or narrow corridors will be less useful than wide-open areas and passageways that can accommodate bookshelves, office equipment, dividers, and well-designed work areas. Your rental cost may be less for a $20-per-square-foot space that's efficiently laid out than for an $18-per-square-foot space with an awkward configuration, simply because you'll need less of the $20-per-square-foot space.
4. Ask whether you will be required to pay for extras. If this is your first foray into the world of commercial leasing, you may be surprised to learn that the rent doesn't necessarily mean what it does when you rent an apartment or house. In a residential situation, rent is normally one fixed amount. You're rarely asked to pay additional rent -- sums to cover operating expenses such as building insurance, maintenance, or real estate taxes. These costs are, of course, taken into consideration when the landlord sets the rent for an apartment, but they're not added on as separate charges. In a commercial situation, however, you may be asked to pay for some or all of these additional sums. For more information, see Commercial Leases: Negotiate the Best Terms.
5. Ask if the landlord will want a percentage of your profits. Shopping center landlords often demand a share of a retail tenant's profits in addition to the monthly rent. If you have a retail business and are headed for the mall, you may be asked to pay what's known as "percentage rent."
Want to Learn More?
For help negotiating rent, see Negotiate the Best Lease for Your Business, by Janet Portman and Fred S. Steingold (Nolo).