Christelle Rohaut is an Environmental Engineer, Urban Planner & CEO of Codi, a tech company reinventing how we live and work.
Navigating the world of commercial real estate can be difficult—even if you’ve found great people to guide you. The trickiest elements are often the ones that lie waiting in the shadows—the unseen expenses that could cost your business a significant amount of money.
I’d like to help alleviate some of the fear by shining a light on some buried expenses. As the CEO of a company that helps people find workspaces, I’ve seen how tenants’ lack of knowledge and hidden costs can easily lead to financial horror stories. Here are three common pitfalls and how to avoid them.
1. Taxes And Tax Assessments
The first pitfalls to look out for are those related to taxes and tax assessments. Landlords often charge taxes as a percentage increase over a base year—usually the year the lease is signed. This means that every year, tenants may pay an increasing percentage of taxes on the portion of the building they occupy. If a building undergoes a significant capital improvement or renovation, for example, tenants could see their taxes increase, potentially leaving them on the hook for a large unexpected expense.
To avoid this issue, I recommend that prospective tenants ask to see the last several years’ worth of tax statements before they sign. Inquire about any ongoing or planned projects that may affect taxes or could result in assessments.
Finally, carefully review your lease agreement to understand all the potential costs you could be held responsible for. You may want to consult a real estate company or professional for help with this. (Disclosure: My company assists with this.)
2. Unseen Issues And Expenses
Another significant expense often comes from unseen issues within buildings. Air conditioning systems are a great example. Many buildings have air conditioning systems that are specific to each unit, and standard lease language may assign responsibility for those systems to the tenants in that unit. Significant expenses may result if the system breaks down unexpectedly.
To mitigate this risk, consider having a third-party HVAC contractor inspect the unit before you sign a lease agreement. You can then negotiate with the landlord for a cap on expenses, or stipulate that the landlord must cover costs beyond a certain dollar amount.
It’s worth recognizing, too, that office densities change dramatically as years go by, and some older systems weren’t built to accommodate the number of occupants they now host. The additional strain may be shortening the lifespan of an existing system, and supplemental units may be needed. It’s important to get an HVAC expert on the scene to point out any potential disasters.
3. Lease Renewals
Lastly, when negotiating lease renewals, make sure to consider your options. If the first draft of your lease does not include a renewal option, try negotiating for one before you sign. This gives you the ability to renew your lease for a set period of time with a predetermined rent increase limit.
If you are already locked into a lease and want to renew, you will have to negotiate with the landlord directly. At that point, your bargaining power will depend on factors such as building vacancy rates and the demand for space in the area.
Watch out for sneaky upcharges, such as admin or project management fees for repairs, or requirements that you use specific vendors who may be more expensive. It’s not uncommon for leases to mandate specific vendors who then send “referral bonuses” back to landlords—extra costs that ultimately impact renters.
Leasing or renting a property can be a challenging process filled with many hidden costs. However, you can protect yourself by proactively negotiating your lease.
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