Cost Of Commercial Real Estate Leasing

Commercial real estate leasing transactions are complex and difficult to scrutinize.

Unfortunately, some landlords may use this to their advantage, blending in costs that make occupying a space costlier for tenants. To make sure that there aren’t any excessive charges, keep an eye out for the following:

1. Large Insurance Deductibles

While tenants should be expected to pay portions of the landlord's insurance costs as an element of their common area maintenance (CAM) fees, caps should be placed on insurance deductibles. Some forms of property insurance, like earthquake insurance, can have astronomical deductibles. Make sure that your lease agreement spells out a limit on the amount that you can be charged through CAM.

2. Improvement and Maintenance Costs

Improvement and maintenance-related costs are typically figured into CAM, but language should be inserted to save tenants from sudden, huge costs or unnecessary upgrades. For example, if a building is inspected and found not to comply with accessibility requirements landlords could have to pay a lot to bring the property up to code.

A clause that stipulates that tenants aren’t responsible for any fees for improvements that the owner should have made to conform with laws and regulations can protect you from being charged some of these costs. Also, leases should spell out that cosmetic improvements (like the new artwork for the lobby), shouldn’t come out of tenants' pockets.

3. Load Factor

The load factor is another area of the lease where the owner can attempt to assess tenants’ over-the-top costs. All leases include a load factor, an amount that is added to the square footage to account for square footage located outside the office space that a tenant rents. Make sure to ask landlords for the equation used to calculate the load factor to verify that it is being assessed fairly. Landlords should be using identical load factor for every floor of a building or adding on square footage that is not actually shared or usable, like areas under outdoor overhangs.

4. Taxes

Property taxes are passed along to tenants, but like insurance, there should be protections in place to protect companies from a sudden increase in property tax rates. Cities and townships reassess property values periodically. If an office building is assessed at a greater value, subsequent tax payments will be higher. A cap on maximum increases can help to avoid a sudden dramatic spike in insurance payments through CAM. Remember that reassessments can also work in tenants' favor. If the building is reassessed at a lower value, the landlord's property tax costs will decrease, and tenants' insurance costs should in turn; however, landlords may not provide this information.

Make sure to stay informed of reassessment status, know what the outcomes are, and request a renegotiation if you discover the building received a lower tax assessment.

That’s why having a knowledgeable commercial real estate agent working with you throughout is a great asset and will benefit you in the long run. And all at no cost to you, the Tenant.

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