Market Lease Rate or Affordable Lease Rate? Office Space
Rental rates, in essence, are affected by numerous elements: the lease term (duration), the size of the property, amenities, views, proximity to certain locations, the current market/economy, etc. Market conditions influence rental rates, which oftentimes tend to increase. Once a lease is signed, the rental rate is fixed for the lease term. Because there are a number of factors that comprise rents and several customary ways to quote rents, it can be difficult to understand what people mean when they are discussing leasing rates.
Normally, the rate quoted reflects the amount of rent you pay per square foot. Generally square foot prices are quoted on an annual basis, in other words $xx.xx per square feet per tear. For example, a $24.00 per square foot annual rate is equal to $2.00 per square foot when expressed as a monthly rate. It is important to understand this concept, that as we presented before is just simple math, since it can create confusion when comparing the different basis. While this is simple math, it can come as a bit of a shock when you hear a rate quoted for one space as $2.00 per square foot and another as $24.00 per year.
Now it is important to define what does that rate cover, Does it cover all in? Does it cover all in but it may variate depending on increases in property taxes, etc? For this, we have to be clear and even though there are definitions for each type of lease, we always should make sure what Included.
The lease as may be classified as:
Full Service Lease
• Net Leases
• Ground or Land Lease
• Step Lease
• Indexed Lease
• Percentage Lease
Selecting the right space and the right lease for your business is crucial for the success of your business plan. Prospective tenants look for a space based on the required square feet, how many offices and conference rooms, and desired location. After an initial long list, a short list of locations is selected; along with the analysis of the asking rent and conditions versus the market rental rates. Finally after some negotiations the final space is selected, and a lease agreement is drafted, further negotiated and executed.
Any business operation must have a sound business plan with a clear indication of revenues and expenses. The rent expense is an important ingredient of the overall expenses affecting directly the bottom line and must be look at very carefully before entering into a mid to long term lease commitment. Fortunately we don't need a crystal ball to find out what should the rent expense be for a particular business. There are gathered statistics which provide the base rent and the dollars to move in ratios: the Industrial Rent to Revenue Ratio or I-RRR and the Dollars to Occupy Ratio or DTOR. These ratios are based on the Industry sector, ie. Law Offices, Architect Offices, etc.
By knowing the projected revenue and supplying these ratios to it, we can determine what is the rent a business can afford to pay. This analysis, dear readers, must be done at front, because it will determine what location you should choose. We always want live close to the office, but maybe by commuting 45 minutes I may be into track with my Dollar to Occupy rent not affecting my bottom line.
This is just a brief description of the process a business should follow before entering in a lease commitment, remember, once you execute that lease, you are in the hook!