Leasing agents pride themselves in getting the appointment. They relish the opportunity to meet, charm and sell the prospective tenant any property they represent. If they have positioned their property properly (gives the appearance the costs are competitive and in line with other comparable properties), once you have called and asked your questions most likely you will set up an appointment and come in.

Most prospective tenants ask very basic questions:

PROSPECT: Hi, I'm looking for about 2,500 square feet. Do you have it?

Pretty basic stuff huh? But what has really happened here?

The prospective tenant learned that the building has a variety of spaces that may fit his square footage requirements and the rate is $18.50 per square foot. Or so he thinks.

The leasing agent learned that the prospect is in the insurance business, which is a compatible use for the building. He learned that the tenant wants a 3 year lease, which he feels might be stretched to 5 years. The prospect has friends and clients in the building. He seems to like the building a lot and obviously the rate didn't scare him, after all he got the appointment.

What really transpired through this conversation is that the leasing agent has learned enough about the prospect to warrant further discussion. The prospective tenant didn't learn a thing.

You see, rate and square footage mean nothing, if you don't ask enough questions. Two buildings can quote the same $18.50 rate and be worlds apart in cost to the tenant. Let me share and define a few items you must ask about that will greatly effect the cost of leasing space in a building.

Common area factor: This is the area in a building of common use to all tenants. A building's common area usually includes the building lobby, all hallways, janitorial and electrical closets, bathrooms, etc. Only vertical penetrations, such as elevator shafts and stairwells are not included in this measurement. The owner of the building determines how much square footage makes up the total common area of the building. This figure is converted to determine what percent of the building is common area then added on to the amount of square footage found within the confines of the space the tenant will physically occupy (Useable space).

Useable space or useable square feet: The amount of square feet found within the confines of the space the tenant will physically occupy.

Rentable or leasable space or square feet: Useable space or square feet plus the building's common area factor (tenant's proportionate share). This is the amount of square feet the tenant will pay rent on.

All buildings are different therefore the common area factors will vary from building to building. One building might have a common area factor of 10% while the building next door might be 20%. In order to lease an office of 2500 square feet in a building with a 10% common area factor you would pay for 2750 square feet. In the building with common area of 20% you would pay rent on 3000 square feet.

Let's take a look at how our $18.50 quoted rate on a space of 2,500 square feet is affected and differs in three buildings:

(No Factor)            (10% Factor)        (20% Factor)

Square feet needed
       2,500 s.f .               2,750 s.f.              3,000 s.f.

First Years Rent
     $46,250.00            $50,875.00         $55,500.00

Rate per sq. ft.
             $18.50               $20.35               $22.20

(based on 2,500 s.f.)

Once the leasing agent has quoted $18.50 per square foot as the rental rate, the prospect should respond by asking, "is that useable or rentable?" If the answer is useable, than you rental rate is based on the space you will physically occupy. Based on 2,500 square feet your first years rent will be $46,250.00.

If the answer is rentable or leaseable, your next question should be, "What is your building's common area factor?" If the answer is 10% you now know in order to lease 2,500 square feet of useable space, you'll be paying a rate of $18.50 on 10% more space or 2,750 square feet. Thus your first years rent will be $50,875, based on the 2,500 square feet that you want that means you're actually paying $20,35 per square foot, not $18.50. If the answer is 20%, you will be paying for 3,000 square feet to get your 2,500 square feet, your first years rent will be $55,500 or $22.20 per square foot.

Please note I continually refer to your quoted rate as your first years rent. That is just what it is. If you remember our prospect asked for a 3 year lease. The next question the prospect must ask is, "How do you handle your annual rental increases?" Your rate is not going to be the same for the length of your lease, unless you negotiate it as part of your lease, it's highly unlikely that you will. The leasing agent's answer will probably be "we adjust rents according to the CPI (Consumer Price Index)" or the response might be "we adjust our lease based on 5% per year." Let's take a look, based on the same three properties we reviewed above and see how 5% annual increases your lease rate:

(No Factor)            (10% Factor)        (20% Factor)

Year One
$46,250               $50,875                   $55,500

Year Two
$48,562.50               $53,418.75            $58,275

Year Three
$50,990.63               $56,089.69            $61,887.75

Total Rent
$145,803.13          $160,383.44          $175,662.75

Avg Rate

Per Sq. Ft.
$19.44                   $21.38                   $23.42

So much for $18.50 per square foot.

Building Operating Expenses: The amount it costs the owner to operate a property.

In most markets office building rates are most often quoted on a "full service lease" basis. The tenant must be a bit wary of this. The true definition of a full service lease/gross lease, is all costs are included in the tenant's lease rate. In fact the term full service is being mis-used to define what is commonly known as a "modified gross lease." This is a lease inclusive of almost everything, except the tenant is expected to pay his proportionate share of additional operating expenses.

Operating expenses increase annually and are usually paid in advance. Now you're probably asking, "how can they do that? How can anyone charge me advance when they have no idea what it will actually cost them to operate the building over the upcoming year?" They estimate and bill you on their estimate of what the operating expenses will be for the upcoming year. A good leasing agent will tell you this up front. Most don't. When they don't this becomes a hidden expense and a nightmare for both the tenant and the property manager.

Operating expense increases are usually explained to the tenant in one of two ways. When you ask the question "how do you handle operating expenses?" the answer could be, "We use an expense stop." This is a dollar amount that is set well below the actual operating expense figure. It is usually presented as, "The landlord pays the first ___$'s of your operating expenses for the year, anything above this figure is on you. You can just about be sure if a building is quoting on the expense stop basis the flood gates are about to open. Avoid it whenever possible. The second method is to quote expenses on a base year method. This is a preferred method for you. Make sure that you use the current year or even a future year as your base year. This simply means you will pay any amount exceeding the operating expenses based on how much the building operated at on that given base year.

Let's re-visit our three buildings and see how the rates look once we have added the annual operating expense increases over three years. We'll base the increases on 5% per annum:

Building #1             Building #2             Building #3

(No Factor)            (10% Factor)        (20% Factor)

Year One
$48,562.50               $53,418.75           $58,275.00

Year Two
$50,990.63               $56,089.69            $61,188.75

Year Three
$53,540.16               $58,894.17            $64,248.19

Total
$153,093.29          $168,402.61         $183,711.94

Avg Rate

Per Sq. Ft.
$20.41                   $22.45                   $24.49

Rates are rarely quoted on a useable basis in office buildings, therefore the scenario used in Building #1 is all but extinct. You might find one, but it's unlikely. Typical deals fall somewhere between Buildings #2 and #3.

When inquiring about lease space remember to ask about:

        1. Rate per square foot

        2. Common area factor or common area maintenance fees

        3. Annual increases

                a. rental rate

                b. operating expenses

This information will help to eliminate some of the hidden unpleasant surprises and eliminate unnecessary heartache. It will give you a better handle on the real cost of lease space.