Ask questions about the building before sitting at the negotiating table to lease office space.
Part 2 of 2
A building’s operating expenses and common area maintenance (CAM) costs are negotiable! Negotiating a smart contract to lease office space, retail retail or industrial space in Tucson requires you to know a lot about the property before you sit down with the landlord.
How big is the space?
Your rent and pro rata share of CAM costs and operating expenses are calculated on the square footage you want to lease, so make sure it’s right.
Find out which measurement standard the owner used. It should be one that’s recognized in the industry.
Get the right to adjust the rent if you find out the square footage is “materially” different from what the owner originally told you. Verify the square footage when the owner finishes building out the space for you.
Require the owner to give you detailed plans confirming the gross leasable area (GLA), which could be used to calculate your share of operating expenses and CAM costs.
What condition is the building in?
You may have to pay more to keep an old building with aging equipment operating and well-maintained.
Find out how old the building is and when its major systems, such as HVAC systems and elevators, were last repaired or replaced.
Will you pay for capital improvement projects?
You may be responsible for paying a share of current or planned capital improvements.
Find out if the cost of the improvement that will be passed through to you will occur all at once in the year the work is completed or if it will be amortized.
Ask whether the cost of previous capital improvement projects will be passed through to you. Avoid paying the amortized costs of projects that are completed before you committed to lease office space.
Have any energy conservation measures been implemented?
Such measures saves you and the owner money. If no energy conservation measures have been implemented, you may need to hire an engineer on your own to propose energy cost-saving measures.
How is electricity cost measured?
Find out if your space has a submeter that measures the exact amount of electricity used in just your space. If you have to share a main meter with other tenants, find out how each tenant’s share will be calculated.
If the owner will bill you for electricity costs separately from CAM costs and operating expenses, know what the building’s electricity rates and markups are.
What is the owner’s tax situation?
Find out if the owner is involved in tax appeals or recently won a tax appeal. You could get a lower tax bill.
Ask if real estate taxes will be subject to an abatement, exemption or other incentive program. If they are, find out how that will affect your annual real estate tax liability and your tax base year amount if you’re negotiating a base year lease.
Ask about expiration dates on any incentive programs that could increase your share of real estate taxes.
If you are negotiating a base year lease on a new building, make sure that the owner will set the base year’s taxes as the first year the building is taxed on a full assessment.
Will the office space lease have a gross-up clause?
Some operating expenses change when the building’s occupancy changes. Those changes affect your share of the costs, sometimes causing big swings in what you owe when you lease office space in that building.
Putting a gross-up clause in your base year lease, called “grossing up,” is supposed to prevent these big variations. The owner determines what these variable operating expenses would be if the building were nearly full—say, 90 percent. This is done for the base year and for every lease year thereafter. This evens out the expenses regardless of the actual occupancy rate.
But there’s a downside. Sometimes the operating expenses will fall below the gross-up determination. Without a gross-up clause you wouldn’t owe anything toward operating expenses. But with a gross-up clause, you will owe something.
If the lease will have a gross-up clause, you’ll want to know how the owner will calculate the gross-up costs.
If the building is new, closely examine the proposed calculations for electricity and other utility costs.
Are the property manager and owner related?
If the owner and property manager have a relationship by family ties or common ownership, there’s a chance that the owner will pay the property manager more than the normal market rate.
Find out how much the management fee is and what the payroll costs are. They should be within market-level norms.
Who works for the building?
Because CAM costs and operating expenses typically include staff salaries and wages, find out
- the number of building administrative staff
- what each staff member does
- what each gets paid
- what percentage of the building’s budget is allocated to staff salary and wages.
Make sure each person is performing a legitimate job and is getting paid only for the time spent managing or servicing the building or center.
Check the general ledger to make sure that the owner isn’t burying an excessive salary or management fee in other accounts.
Find out if any individual or firm providing services to the building in which you want to lease office space is related to the owner.
What do above-standard services cost?
Above-standard services, such as freight elevator usage, excess janitorial services, additional utilities and overtime HVAC, come at a markup. Find out what those charges are and how often they’ll increase.
About Commercial Real Estate Group of Tucson: As a commercial real estate broker that represents only tenants in lease and investment transactions, we can identify potential reductions in your share of CAM costs and operating expenses. To get a comprehensive report, contact Commercial Real Estate Group of Tucson, 520-299-3400, commercial-real-estate-tucson.com, email@example.com.