MySquareFeet Blog

Operating Expense Escalations Explained

In the early part of every year, tenants in many commercial buildings will get their "operating expense escalation" bills.  In the past, this was a very predictable 2-3% over the previous year, but today, with rising utility costs and insurance, operating escalations are anything but predictable. Tenants need to know what constitutes their operating expenses and how they can minimize the impact on their rent and occupancy costs.

Simply put, operating expenses are the total cost of all the goods and services needed to keep a commercial property running.  Among them are the costs for utilities, heating, air conditioning, water, trash removal, landscaping, snow removal, janitorial expenses, security, insurance, accounting, management fees, repairs and maintenance or other costs associated directly with the operation of the property.  Real Estate taxes are generally calculated separately, but methods for "passing through" escalations are similar.

Security Deposits Explained

Landlords require security deposits when they lease commercial real estate to tenants. The basic logic behind the security deposit is to protect the owner from physical damage to the property when a tenant leaves and/or to give the owner a financial cushion in the event of a monetary default under the lease.

In my experience, the "Security Deposit" clause in a lease is heavily negotiated and the inability to agree on the terms can sometimes cause the negotiations to break down. It is such a "deal killer" issue that it is a good idea to make sure that the monetary terms of the security deposit are laid out in the offer or the "Letter of Intent" along with other financial terms before lawyers are engaged to begin drafting leases. I think tenants and owners need to know if they can come to an agreement on this important business issue before they move on to other points and spend money and waste time on a transaction that is doomed from the start.

Office Suites, A Sweet Alternative

For Valentine's Day, I thought I would examine a "suite" alternative to leasing conventional office space for small businesses.  They go by many names, Office Suites, Executive Centers, Business Centers, Virtual Offices, or Executive Offices, and offer many different service packages and levels, from basic to gold plated opulence, but they all do one basic thing - provide an immediate plug-and-play office for your business.

I had never actually visited one of these services, so I called upon Tom Jamison of Connecticut Business Centers to give me a personal tour and behind the scenes look at his operation.  It was an interesting visit and I now think about the benefits these services can offer a small tenant in a different light.  To quote Tom, "If you tell me you want an office today, you can be in business with a T-1 connection here tomorrow." 

On Rentable Square Feet, Usable Square Feet and Measuring Office Space

In response to my post “How a bad lease can bankrupt your small business.” I got an email from Jewell in Orange County, CA. She asked:

“What do you do to verify the difference between rentable and usable square feet?  We have had many answers about how it was arrived at…the usable sq ft is 841 and the rentable sq ft is 1067.  I would love to have some tips on how to verify the difference.”

In my twenty plus years in commercial real estate, I have had as many explanations from owners for arriving at building measurements as there are buildings, it seems.  Miraculously, when some buildings were sold, they were one size with Owner A, and the next day, Owner B would re-measure the building and it was significantly larger!  We jokingly called this “rubber ruler” measurements.  However, there are some conventional standards for building measurement which will point you in the right direction.

For Lease Signs or Goldilocks and the Three Bears

A friend of mine was telling me the story of how she was looking for space for her office the other day.  She only needed a couple of offices, which is clearly not the type of requirement that sets a commercial broker's heart on fire, so she decided to try to find it herself.

She had checked on line at my site MySquareFeet but there was nothing suitable posted, then she checked the newspaper but nothing was there either.  So, she took to the road, because "for-lease" signs are commonly found in front of buildings with space available, in fact there were about 50 signs on a two-mile stretch of the Post Road where she was looking.  She told me that it was quite possibly the most frustrating thing she had to do and she went on and on about how the signs were impossible to read, she almost crashed her car trying to pick up phone numbers while going 40 MPH and most of the signs didn't help much.

Her adventure reminded me of the story of Goldilocks and the Three Bears, some signs were too big, some were too small, but in this case hardly any were just right.