How to Calculate an Office Lease
Selecting the right office space at the right price is important for your employees and your profitability. To know if you're evaluating the right lease for your business, it helps to know how to calculate lease costs. There are two kinds of leases: base lease or triple-net lease. A base lease is base rent plus annual escalations to reflect increases in operating expenses, plus a portion of sales for retail leases. A triple-net lease is base rent plus proportionate share of operating expenses.
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Instructions
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Analyze your requirements, such as the number of employees, occupancy date, accessibility and security. This will impact the size and location of your new office.
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Estimate the square footage requirement. You can use an online tool to complete detailed calculation based on number of offices and common areas, and a "rule-of-thumb" estimate based on square footage per employee. Typically, if you're looking for an "efficient" workspace for 10 employees, you'll need about 1,850 square feet of usable office space (see Resources).
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Gather base rental rate information. Contact commercial property management offices and get estimates. Check newspaper classifieds. Check online as well to compare against a variety of markets and factors (see Resources). Rates are usually quoted in dollars per square foot, on an annualized basis. For an 1,850 square-foot office, for example, if the quoted base rental rate is $20 per square foot, the base monthly rent will be about $3,083 per month (1,850 times 20 divided by 12).
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Estimate operational expenses. For a triple-net lease, ask the property manager to provide you with a ballpark estimate of the proportionate operating expenses (this is your portion of expenses such as utilities, insurance, maintenance and property taxes). Add it to your base rent to get a total estimate. For example, if the expenses average $10 per square foot and the base rent is $20, the triple-net base rate is $30 per square foot. For a base lease, ask for historical escalation increases, if available, or estimate it based on the inflation rate. If a percentage of the gross sales is payable as rent, estimate the cost based on your historical sales data.
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Tabulate and compare the rental data gathered for different office spaces. Prepare a short-list based on your requirements analysis. Discuss the options with your employees and make a choice. Check with other tenants of the building. Make sure it's clear who pays for any improvements prior to occupancy. Prepare an office relocation plan to minimize disruptions in your business operations.
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Tips & Warnings
Executive suites (also known as service offices or office business centers) may be an option. They are a low-risk way to get started. You'll have all the amenities of a professional office at typically 20 to 30 percent of the cost.
Note that there may be an add-on rent factor for the common areas of the building. This means you'll pay rent for these areas in addition to the office area that you actually use. Remember to budget for office furniture expenses.
References
Resources
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