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What does commercial space really cost to occupy?

Total occupancy cost is the combined cost of using a commercial space. Advertised base rent is one component. The complete comparison depends on the lease structure, the building, the space, and the way the business will operate there.

A lower quoted rent does not necessarily produce a lower total cost. A higher quote may include services that are charged separately elsewhere. The goal is to place each alternative on the same time, area, and cost basis.

Start with the same units

Commercial rent may be expressed per square foot per month, per square foot per year, or as a total monthly amount. Before comparing proposals, convert them to the same convention and confirm the area to which the rate applies.

Also distinguish usable from rentable area. Usable area generally describes space available for the tenant's use. Rentable area may include an allocated share of common areas. The lease and measurement standard should identify the area used to calculate rent.

Recurring occupancy costs

Depending on the property and lease, recurring costs may include:

• Base rent
• Operating-expense or common-area-maintenance charges
• Property-tax and insurance pass-throughs
• Utilities
• Janitorial service
• Parking
• Repairs and maintenance assigned to the tenant
• Required service contracts
• Tenant insurance
• Percentage rent for an applicable retail lease
• Storage or other separately licensed areas

The same category may be included in rent at one property and billed separately at another.

Costs that change over time

A first-month comparison can miss important economics. Review:

• Scheduled base-rent increases
• Base-year or expense-stop pass-throughs
• Changes in estimated NNN or operating expenses
• Annual expense reconciliations
• Options and the method used to set option-period rent
• Free-rent periods and when full payments begin
• Expiration dates for concessions or included services

Variable costs should be modeled as a reasonable range rather than an unsupported prediction.

One-time cash requirements

The decision may also require cash for:

• Security and other deposits
• Design and professional services
• Permits and approvals
• Tenant improvements and equipment
• Furniture, fixtures, cabling, and signage
• Moving and business-interruption costs
• Restoration or removal obligations

Who performs and pays for improvements, when the premises are delivered, and what condition is required at the end of the term can be as important as the allowance amount.

Build a comparison worksheet

Use one column per alternative and record:

Add the costs over the time period relevant to the business. Keep uncertain items visible as assumptions instead of hiding them inside one total.

Cost is not the only comparison

The least expensive alternative may not be the best operating choice. The business may also need to compare location, access, customer visibility, parking, loading, layout efficiency, infrastructure, permitted use, timing, and the cost of adapting the space.

These factors should be evaluated together. A space that does not support the intended use or timing is not made viable by a lower rent.

How MacVaugh can help

MacVaugh helps businesses define requirements, identify and compare locations, evaluate occupancy economics, and negotiate leases or acquisitions. Send us the spaces you are considering or describe the requirement you are preparing.

This page provides a comparison framework, not legal, tax, or accounting advice. The proposed lease and advice from the appropriate professionals should control the final decision.