So How Much Does Your Business Neighbor Really Pay?

Several years ago, a client’s C-suite was contemplating a move to a new office, touting the cheap rent in an undeveloped part of the city.

At that time, they were paying about $40/ ft² and the market was trending towards $50; the colleagues were talking about $17/ ft² in the new neighborhood. Immediately there was a call to their broker asking why they were being shown space in the $45/ ft2 range when $17 was available. Well, they answered, if you wanted to fund the TI (tenant improvements) from the bare girders out, you could get shell space for $17 and then pay $35+/ ft² for bare bones TI… and good luck with getting a bank to finance that!

Another rent item that’s not evident in a public quote is the number of months of free rent a landlord might offer. For example, they may quote renting a space at $40/ ft², but that’s the rate charged after the free rent period has finished. If this were a 5 year lease and the first 6 months were free, then the effective rate over the 5 year term is $36/ ft².

TI can be a significant item when comparing competitive office space quotes. Most times a new tenant will receive a TI allowance to fund at least some basic sprucing up. For example the allowance might cover replacing the old carpeting, repainting the walls, replacing some worn ceiling tiles, etc. If the allowance goes beyond this, for example, to provide for the building of new offices, conference rooms and an eat-in kitchen, you’ll want to know the value of that construction. The quality of the items as well as the number of offices required, for example, can be a distinguishing factor from one space to another.

Qualitative factors aside, a quantitative analysis can help evaluate competing quotes. The price paid for the pure rent cost should be determined. The rent/ft² quote should be netted down for the value of the free rent period, TI and any other allowances. Parking space allowances can be significant if you would be in an area that requires parking fees. Once you have the pure rent and TI pieces identified, then you can quantify any costs you will have to absorb as a tenant. For example, the TI allowance might not be sufficient for your space to be fully functional for your company’s needs. Those out-of-pocket costs along with any related financing costs need to be factored in.

So the next time someone brags about the great lease deal they closed that soundly beat the market price, ask a couple of questions.