Understanding the jargon of an office lease

If you are the owner of a small or large

business, you have probably experienced

the challenges and frustrations of negotiating

a commercial lease. Unlike renting an

apartment, leases for commercial space are

not always simple and clear. The world of

commercial leasing has its own jargon,

procedures and norms to describe the costs

a business owner will pay to occupy space.

If you are considering leasing commercial

space it is important that you understand

the terminology used when landlords

or brokers are quoting lease rates and

other costs beyond the base rent. A clear

understanding will help you make meaningful

price comparisons and to arrive at

smart real estate decisions for your firm.

Today, we'll look at terminology and

costs typical in leasing office space.

Q: When I call to ask the price for a

leased property and the broker or owner

states that it is a "full-service" rate, what

does this mean?

A: A full-service rate means that your

price includes all expenses associated with

the leased space and the total property.

Typically these expenses include real property

taxes, insurance, common area maintenance,

janitorial services and utilities. This

type of lease rate is very typical in office

buildings that are two stories or more.

Q: What does the "expense-stop" clause

mean in my office lease?

A: Landlords are able to estimate their

costs to operate an office, but cannot

always predict increases in certain expense

items. Therefore, it is common to see an

"expense-stop" clause, which requires the

tenant to pay for the escalations in operating

costs over a specified ceiling. Expense

stops may apply to all operating expenses

or be limited to certain costs. For example,

few people saw the recent utility challenge

coming in the California market. A savvy

office landlord would have included a

clause in the lease requiring tenants to pay

for increases in utility expenses if they

exceeded a set per-square-foot figure,

established in a base year.

Q: Why is there a difference between

rentable square feet and usable square feet?

Don't I get to use all the space I pay for?

A: This is a good question and an

important point to analyze when comparing

buildings and leases. The rentable

area is the entire building minus major

vertical penetrations (such as elevator

shafts, vents and stairways). In a lease it

refers to the square footage that the tenant

will be paying for including their pro-rate

share of common areas such as lobbies, fire

corridors and restrooms. The useable area

includes the total rentable area minus all

the floor and building common areas.

The rentable area divided by the useable

area translates into the "load-factor" or "addon

factor." For example, if the load factor in

an office building is 10 percent, a tenant will

pay rent on 1,000 rentable square feet but

only occupy 900 usable square feet. A building

with additional services such as a fitness

center, common area lobbies or mailroom will

increase the load factor and, therefore mean

an increase in monthly lease fees. But, it can

also offer additional amenities benefiting your

employees and customers and improve the

aesthetic quality of the building.

Before you make a final decision on

your next commercial office lease, make

sure you ask the building owner or broker

if he is quoting a full-service lease, what

your expense stop is, and what percentage

of load-factor percentage the lease

includes. Knowing this information

ahead of time will allow you to make an

accurate comparison of costs and smarter

long-term decisions for your business.

Par Tolles is managing director of

Trammell Crow Co. in Reno.