Commercial Real Estate News / Insight / Hidden Costs of Office Space

Hidden Costs of Office Space

Published: 07-30-24 Category: Insight

Specializes in providing actionable insights into the commercial real estate space for investors, brokers, lessors, and lessees. He covers quarterly market data reports, investment strategies, how-to guides, and top-down perspectives on market movements.

If you're considering renting commercial real estate for your startup business, you may feel like you're buying stocks for the first time: It's easy to assume that other, more seasoned business owners know more about the market and have more financial backing than you.

However, any business owner shopping for office space for rent can overlook the additional costs that may dent their cash flow…maybe a bigger dent than they can manage.

Even if these costs are spotted before a lease is signed, you may end up wasting considerable time by seriously considering an office space rental that was ultimately above your leasing budget.

Considering that most office lease listings keep details minimal, it's ultimately up to you to identify the hidden costs and discuss them with a potential landlord. Many expect potential tenants to negotiate details, so they prefer to post basic listings online.

To help make your office leasing experience less stressful from start to finish, we'll take a closer look at office leasing costs and its accompanying expenses that get frequently overlooked.

You'll learn how to identify them, learn about the types of leases that may or may not include them, and when it's a good idea to negotiate them.

#1 – Property Taxes

Since apartment renters are never billed for these, you may not know that commercial tenants are usually liable for property taxes. They're included in the three most common types of commercial leases, which are known as single, double, and triple-net leases.

These taxes vary depending on the location and value of the property and can potentially bump up your annual expenses by thousands.

Also, if the building is renovated and a new appraisal reflects this, your share of property taxes may rise.

#2 – Common Area Maintenance (CAM) Charges

These cover costs of upkeep and maintenance of shared areas and spaces, which are described as common areas within commercial real estate. These may include lobbies, reception areas, elevators, parking lots, and landscaping.

Other costs may cover janitorial services and seasonal costs, such as snow removal.

These charges vary depending on your office space's square footage, and they often increase annually.

Also, if you decide that your offices or common areas need more frequent cleaning than outlined in the CAM charges, this will probably be charged separately.

#3 – Utility Bills

These depend on the building's design. While electricity and water are almost always included, other utilities, such as gas, may be included.

An older building with inefficient HVAC systems may add up to a bigger monthly utility bill.

#4 – Security Deposits

A security deposit may be required, and it can be quite expensive if it's equal to several months' rent.

#5 – Insurance

Most commercial leases require tenants to carry liability insurance. Your lease may require other types of coverage, such as property and business interruption policies.

While this coverage protects you and the landlord, it will bump up your annual costs.

#6 – Shared Operating Expenses

Your lease may contain a clause requiring you to pay a share of the building's operating expenses.

This can be tricky, as it can include anything from property management fees to security services.

Before you sign your lease, you'll want a thorough explanation of this clause and clearly stated costs.

#7 – Parking

This may not be included in your base rent. Costs may vary depending on whether your lease includes reserved spaces for your customers and/or staff.

#8 – Wifi and Communications

Your lease may or may not include the costs of high-speed internet and/or landline phone lines.

Check to see if these are already in place or if you'll need to take care of them yourself.

#9 – Maintenance and Repairs

You may be responsible for maintaining and repairing your rented space. This can include everything from minor fixes to major system replacements.

This clause is sometimes easy to overlook, as it's similar to CAM charges.

#10 – Compliance and Accessibility Upgrades

If your business operates within specific compliance or accessibility standards, installing or modifying these may incur additional costs, which often fall to the tenant.

This can include installing ramps, modifying restrooms, or updating fire safety systems.

#11 – Lease Administration Fees

Some landlords charge an additional fee for preparing your lease documents, processing payments, and similar tasks.

#12 – Escalation Clauses

Look for clauses that allow the landlord to increase your rent and other fees each year. These increases can be fixed percentages or depend on economic indicators like the Consumer Price Index (CPI).

Now that you're aware of possible hidden costs, it's wise to prepare for them before you review a new lease. In addition to reading the lease carefully, don't be afraid to ask the landlord to clarify any terms that appear ambiguous. In addition, be prepared to:

Negotiate. Don't be afraid to discuss terms with your potential landlord, especially if vacancy rates for the building are high.
Get it in writing. Don't accept any verbal promises made by a landlord or building owner.
Consult a pro. Consider using the services of a CRE broker or real estate attorney.

With proper research and preparation, you can avoid costly surprises and find an office space that truly works for your business.