Tuesday, August 7, 2007

Commercial Leases - 2 Things You Should Know about "Common Area"

Vicki Watzlawick of Exit Platinum Realty asked me to do more posts about commercial real estate terms so hopefully you find this informative Vicky...

Thanks for the suggestion.

Negotiating a lease for commercial real estate is something that is done by real estate professionals all over the country every day for their clients. As a business owner, you want to make sure it's done right the first time. One thing you need to understand is the Common Area of a building and expenses associated with it.

The Common Area of a building is calculated by adding up the square footage of lobbies, stairwells, shared bathrooms and other sections of the building that are used by all tenants "in common".

Below are 2 terms you want to understand that relate to the Common Area of a building.

CAM Charges - CAM stands for Common Area Maintenance. These charges include expenses such as snow removal, landscaping, and general building maintenance as it applies to the Common Areas of the building. These expenses are usually divided among all tenants in the building based on each tenant's square footage. If each tenant has 1,000 SF of a 10,000 SF building, each tenant would be responsible for paying 10% of the Common Area charges. You want to make sure that the lease rate that a landlord quotes either specifically includes or excludes these charges.

You may see a rate quoted as $15/SF but further down in the body of the lease there could be a reference to CAM charges that equal another $3/SF. This additional charge just bumped your rent up 20%. These types of charges are common in industrial properties and some newer retail properties but not as common in office properties. You would typically have these charges built into an office lease.

Common Area Factor - Often times a lease will reference leaseable area of a space not the usable area. Let's take a 100,000 SF office building as an example. Of the 100,000 SF, there is a huge lobby on the first floor and small lobbies on each of the 4 upper levels. This lobby area totals 10,000 SF or 10% of the total building's square footage. Technically the building only has 90,000 SF of "usable area" available to the tenant but the landlord wants to make sure he is making money on all 100,000 SF. After all, somebody has to pay for the cleaning and upkeep of the common areas and the landlord doesn't want to do it.

How this is addressed is that the landlord applies a "Common Area Factor" of 10% to each office suite in the building. If a tenant is looking at leasing 1,000 SF, the tenant will actually have to pay for 1,100 SF. The idea is that if the landlord gets an extra 10% from each tenant in the building, he covers the entire 10,000 SF lobby area. You want to make sure that the landlord explains how he calculates leasable area.

The "common area factor" I used above in the example can vary greatly from one property to another and this is an important point to consider when comparing properties. One building may use a common area factor of 10% which means that if you are looking to lease 1,000 SF you are going to pay for 1,100 SF and another building may have a lot of lobby space and other common area and for the same 1,000 SF requirement, you may end up paying for 1,200 SF because the building has a 20% common area factor. Ideally, and often times in new construction, buildings are being designed with little or now common area which means that if you are looking to rent 1,000 SF you are going to pay for 1,000 SF.

Do you have more questions about commercial real estate terminology? Check out these posts for more important terms to know...

What's A Vanilla Box Anyways?

Commercial Real Estate Terminology - What does this stuff mean???

1 comment:

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