Office Space Lease

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What Is an Office Space Lease?

If you're looking for an office for your business, you might consider signing an office space lease. These contracts typically run for about six months to a year. Most office space leases do not automatically renew, so business owners have a chance to change or renegotiate the agreement after the initial term of the lease. A tenant cannot vacate the property without breaking the lease. Generally, neither the landlord nor the tenant can change the terms of the agreement before the period of the lease expires unless both agree to a change.

Office space is usually somewhat less expensive per square foot than comparable retail space as office space comes with less risk; office leases are typically longer than retail leases, and tenants are more likely to renew the lease. Office space leases are good for businesses looking for things like:

  • Cubicles
  • Reception areas
  • Public restrooms
  • Space for offices

Types of Office Spaces Leases

You'll find a few types of commercial office space leases:

  • Full service leases: Also known as a gross lease, a full service lease is the simplest and most commonly used type of commercial office lease. This is typically the best kind of office space lease a tenant can sign. With a full service or gross lease, a landlord charges a tenant one gross lump sum payment each month. Full service leases make the landlord responsible for paying for all expenses associated with a property, including:
    • Janitorial services
    • Property insurance
    • Property taxes
    • Maintenance and repairs
    • Utilities
  • Net leases: You may come across both double net leases and triple net leases. In general, a net lease includes a base amount of rent, plus a range of expenses related to the building. When you sign a net lease, a landlord will generally charge a significantly lower annual rent than a full lease. However, the landlord may also include "usual costs" on a monthly basis, making the total amount you pay increase as "net" charges get added to the overall cost.
    • Double net leases: Typically displayed in property leases with an "NN" designation, these leases have a tenant pay for utilities, janitorial expenses, and base rent, plus:
      • A tenant's share of property insurance
      • A tenant's share of property taxes
    • Triple net leases: Also known as "NNN" leases, this type of net lease charges a tenant base rent, janitorial expenses and utilities, and their share of:
      • Common area maintenance fees, known as CAM fees
      • A tenant's share of property insurance
      • A tenant's share of property taxes
  • Modified gross leases: Rent on this type of lease is fixed, so you won't have any unexpected charges or hidden costs. Instead, along with rent, a tenant will pay their portion of:
    • CAM fees
    • Property insurance
    • Property taxes
  • Percentage leases: These types of leases charge a tenant a base rent as well as a portion of the gross sales made from doing business in a building. Percentage leases are frequently used in retail malls.

Image via Unsplash by saltnstreets

How to Determine the Office Space Size You Need — And What That Will Cost

When you're searching for office space, one of the first things you'll need to decide is the size of the space you'll need to lease. You'll have to consider things like whether you'll receive clients at the office and how many staff members work for you when making this decision. One common estimate is to account for about 150 to 200 square feet of space for each employee.

Rental price is typically presented as a cost per square foot, calculated either per month or annually. You can calculate commercial rent by multiplying that price by the total number of square feet of office space.

If the rental price you see is for a year, you just need to divide the cost by 12 to figure out monthly base rent. However, different kinds of leases may have different forms of fees or inducements that come together to determine the total monthly outlay.

If you're signing an office space lease with the space priced by "rentable" square foot, the cost may turn out to be much higher than you expected. Landlords can include space that you cannot use to run your business in the lease. Here is an article that explains more about rentable square footage and other considerations when signing an office space lease.

Keep in mind that there's a difference between rentable square footage and useable square footage, and knowing those two figures will tell you the loss factors of any lease:

  • Rentable square footage: This includes common areas that a landlord will allow you to use, for example:
    • Elevators and stairs
    • Lobbies
    • Reception areas
  • Useable square footage: This is the space that will be used exclusively by the staff of your office.
  • Loss factor: You can find this by calculating the percent difference between useable square footage and rentable square footage. Loss factor depends on:
    • The physical configuration of an office
    • The method a landlord uses to measure the rentable areas
    • To a certain extent, the whims of a given landlord — a landlord may include things like air shafts that you are not really using in their calculation of rentable square footage

Factors That Impact Office Rent

Various factors will affect the amount your monthly office rent will be each month. These factors include:

  • Building quality: A building's age, building features, and included amenities impact rent.
  • Location: The more convenient an office space is located, the more expensive it tends to be.
  • Size: Before you commit to a space that's too big for your needs, think about what your business and its staff really require. However, it can get very expensive to move offices later on if you realize you have outgrown your space. If you're considering expanding your business down the road, you might look for an office space with flexibility that will be able to accommodate your business's growth in the future.
  • Type of lease: Whether your office space lease is a full service, net lease, modified gross lease, or percentage lease will affect your monthly costs.

Classes of Office Buildings

When you sign an office space lease, you will want to understand the class of the building. In general, an office's class describes the quality of the structure as well as the amenities. Class is determined in comparison to other building classes. Here is an article that has more information about office space classes.

Three classes of office buildings exist. They are:

  1. Class A: Class A buildings are the highest-quality office buildings on the market. Characteristics of Class A buildings include:
    • High-profile tenants
    • Newest buildings
    • Well-managed
    • Generally the best choices for businesses that need to impress clients, especially in industries such as:
      • Design
      • Finance
      • Legal
      • Marketing
  2. Class B: While Class B buildings are usually older than most Class A buildings, some can still be restored to the quality of a Class A space. Other kinds of Class B structures are known as purpose-made Class B buildings. This latter type of Class B buildings is constructed to offer functional office space for a less expensive price.
  3. Class C: Generally the least desirable office spaces, Class C buildings tend to be former Class A buildings that are around 10 to 15 years old or Class B buildings that are around 5 years old. Compared to Class A or B office spaces, Class C buildings may be:
    • Older
    • Found in less popular locations or neighborhoods
    • In need of extensive maintenance or renovation

If you plan to sign an office space lease, it's important to work with an experienced lawyer who can help you make sure you're getting the right lease for what your business needs.

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