When considering relocating your office space, there are a number of expenses that you need to consider. Beyond rent, there are several items you should plan and budget for in order to complete the lease transaction, build-out the project and occupy the space.
AQUILA’s tenant representation team has helped hundreds of clients with the process of finding new office space, and we know the first year of your new lease can be expensive. Often clients ask us for an “all-in” list of expenses that come up in the first year, so we put together this guide to make sure they are prepared for all the fees that are coming their way.
In this article, we will explain exactly what you should account for when considering an office relocation, including:
- Rent & Operating Costs
- Security Deposit
- Legal Fees
- Build-Out Costs
In Austin, the majority of office leases are quoted on a triple net (NNN) basis. This means, that you will pay a base rent as well as a separate operating expense estimate for the year.
However, if you sign a gross (or full service) lease, both of these expenses will be included in your rental rate.
Base rent is the most apparent cost when considering your leasing expenses.
In most cases it will also be the highest cost associated with your lease.
Base rent is the rental rate you pay per square foot each year. To find your annual rental rate, simply multiply your per square foot rate by the rentable square feet you lease.
For example, if you occupy 2,500 RSF with the base rent of $40.00 NNN, your annual base rent will be $100,000. (2,500 RSF x $40.00 = $100,000).
To find out what average rental rates are in Austin, Texas, read our article: How Much Does It Cost to Lease Office Space in Austin, Texas?
It’s also important to know that your base rent may escalate yearly based on a dollar amount or percentage. This will be outlined in your lease agreement and should be factored into your cost analysis.
Learn More: What Does Base Rent Mean in an Office Lease?
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Negotiate a Better Rate
The asking base rent will be determined by the landlord, based on the class of the building, location, amenities and a number of other factors.
This asking base rental rate can be negotiated. A good tenant representation broker can help you get a market rental rate by leveraging competition and market knowledge.
Free rent, also called “abated rent,” is a concession your tenant rep broker can negotiate in your lease contract.
During your free rent period, you will not have to pay your base rent. However, you will still be responsible for operating expenses (unless specifically called out that the free rent is gross free rent) and any other costs (like parking) that are not associated with your base rent.
Typically, your free rent period is a specified number of months at the beginning of your lease term.
The landlord may offer a concession of free rent to help offset the other upfront costs you will encounter during your relocation.
Operating expenses are the costs associated with operating and maintaining the office building where you lease space and will include these three main components:
- Common Area Maintenance (CAM) expenses
In a NNN lease, operating expense are also quoted on a per square foot per year basis. To calculate your annual gross rental rate, you will add together the base rent and operating expenses, then multiply by your rentable square feet.
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Cap Controllable Expenses
Operating expenses are estimated each year by the landlord and cannot be negotiated.
Your tenant rep broker may, however, be able to negotiate a cap on the controllable operating expenses, limiting how much those certain costs can increase each year. These controllable costs, as an example, do not include property taxes or electricity as they can fluctuate greatly from year to year.
Learn more about operating expenses, what’s included, what’s not and how they are calculated in our article What Are Commercial Real Estate Operating Expenses.
If you have machinery or equipment that requires quarterly or annual inspections, like a server room, supplemental HVAC or manufacturing equipment, etc., this maintenance cost will fall outside of your operating expenses and will be covered by you directly.
This type of expense is not typical in standard office buildings but can be common in flex or industrial spaces.
Any equipment that draws more power than what would be considered “average use” will usually be required to be separately metered and billed back to you outside of your operating expenses.
Items that may fall into this category include supplemental HVAC for a server room or electricity for an uninterruptible power supply. Equipment required by the landlord to be submetered will be listed in the lease document or work letter.
Similar to renting an apartment, a security deposit is standard when signing a commercial lease.
The security deposit required can vary on a case-by-case basis, however in Austin it is typical for landlords to require a deposit equal to one month’s gross rent.
While one month is common, the security deposit that your landlord will require can vary market to market and depend on your creditworthiness as a tenant and TI allowance.
Additionally, although a cash security deposit is typically the minimum amount of security required, it is not uncommon for a landlord to require a letter of credit, personal guarantee or corporate guarantee as additional security.
Parking for office buildings is typically quoted as a ratio of number of spaces per 1,000 SF.
For example, a 100,000-sf building with 300 available parking spots would have a 3:1000 parking ratio.
If you were to lease 3,000 sf within the building, the landlord would allocate nine parking spaces for your company.
In Austin’s urban office nodes, you should expect to pay for these allocated parking spaces on top of your rental rate. In the suburban office markets, your allocated parking spaces will generally be included in your rental rate.
Parking in Austin’s CBD, Domain and Eastside
In Austin’s CBD and other urban office nodes like The Domain or Eastside, parking is becoming increasingly tight as office density increases.
In these areas, you should plan to pay for parking in addition to your annual rent.
In the CBD, parking rates can be as high as $150 – 250+ per space per month, depending on whether the spot is reserved.
This means if you have 20 employees and want to provide unreserved parking for each at an estimated $180/space/month, your parking cost would be $43,200/year (plus tax).
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Save Money with Creative Parking Solutions
Some employers find that it can be more cost effective to encourage alternative transportation to work through rideshare stipends, transportation partnerships and more. Find out more in our article: Five Creative Parking Solutions for Firms in Downtown Austin.
Parking in The Domain and Eastside isn’t quite as expensive, and not all buildings will require you to pay for parking. Typically new construction projects in these areas will require paid parking while the longer standing buildings do not.
Parking in Austin’s Suburban Office Markets
For suburban office buildings, you will not typically be charged any additional parking fees, so long as you do not require more parking than is allocated to you by the landlord.
However, if you require more than your allocated number of spaces, the landlord may be willing to lease more for either an additional parking fee or for a higher overall rental rate.
On the other hand, if you do not need all of your allocated parking spaces, you may have more negotiating power and be able to leverage less parking for larger concessions in other areas such as term, signage, tenant improvement (TI) allowance, etc.
As with any legal document, you should always have an attorney review your lease contract as well as the terms and conditions before signing.
This price will vary depending on your attorney and the time required to review your contract.
Unless you lease a spec suite (a suite already built out based on a landlord provided plan), you are likely going to require renovations to make the new space fit your needs.
This may be as simple as changing the paint and carpet in a second generation space or (if you take a shell space) it may require some serious construction, including the addition of demising walls, millwork, plumbing and more.
Typically, the landlord will provide a tenant improvement (TI) allowance in the lease. A TI allowance is money given to you, based upon the term, credit of tenant and rent negotiated, by the landlord to help you pay for improvements to your office space.
Your tenant rep broker will negotiate this amount with the landlord, and while they will do their best to minimize your out of pocket costs, in a competitive market like Austin, it is unlikely that your TI will cover the full project cost.
For example, if the landlord gives you a $50.00/sf TI allowance, but your project budget is $150/sf, you will end up paying that additional $100/sf out of your pocket.
Additionally, TI allowances can only be used to cover the hard costs and soft costs of a project such as framing, HVAC, doors, windows, architectural fees, permitting, etc..
Things like furniture, fixtures and equipment (FF&E), data cabling and moving expenses will not be covered by the TI allowance unless specifically called out as acceptable in the lease or work letter. If these items are not called out then you will need to budget for these costs separately.
A project manager can help you estimate these expenses as a part of your preliminary project budgets when evaluating space.
Furniture, Fixtures & Equipment
FF&E cannot be ignored when calculating your all-in cost for moving into a new space.
The exact cost is hard to estimate, as it can vary greatly based on preferences, density, and office size and more.
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Renting Furniture May Give You Needed Flexibility
In some cases, it may make sense for your company to rent furniture or purchase pre-owned pieces in order to save money upfront.
Find out more about the benefits of renting office furniture in our article 5 Reasons to Consider Renting Versus Buying Office Furniture.
Data Cabling, WiFi & Technology
Data cabling can be an expensive component of building out your office space.
Standard data cabling requires two drops, or connection points, per employee (one for phone and one for internet), plus a dozen or so additional drops for common areas like workrooms, conference rooms, etc.
Each drop typically costs about $125 – 200, so a company of 50 people can expect to pay between $14,000 and $25,000.
In addition to the cabling fees, you will need to account for your phone and internet expenses. This will include your physical equipment including Wireless Access Points (WAPs), phones, servers, etc. as well as your monthly service fee, which can vary based on your internet service provider and what level service you require. Typically, you will sign a multi-year contract with a vendor such as Spectrum, AT&T, Google Fiber, etc.
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Consider Going Wireless
Data cabling costs can add up quickly. You may be able to save on these upfront fees, as well as create a more flexible work-space for employees by going wireless.
Find out more in our article: Save Money on Your Office Finish-Out by Going Wireless (Wireless v. Data Cabling)
Finally, be sure to plan for any printers and copiers your company will need. Typically, these are leased from a vendor, requiring both a monthly leasing fee and an initial delivery and set up fee.
With any build-out project, you’re going to engage a handful of vendors to design, manage and complete your project.
Depending on your specific needs, your vendor list may include:
- Project manager
- Interior Designer
- General Contractor (and subcontractors)
- And more
For reference, both your architect and engineer will usually charge between 8% and 12% of the total project cost, and your project manager will typically charge between 3% and 5% of the managed costs. A good project manager, however, should save you far more on your project than they cost you in fees.
Be sure to factor in the cost to move into your new office.
In Austin, a good rule of thumb for estimating your moving expenses is to budget about $1.50 to $2.00/sf based on the square footage you currently occupy.
For a 5,000-sf office, you should plan to pay between $5,000 and $7,500.
Most moving companies will include furniture assembly and disassembly in this cost; if your furniture is complicated to set up, you should budget to be on the higher side of that range.
This cost estimate does not include services like TV mounting, whiteboard and artwork hanging, etc. These services can typically be added on an à la carte basis.
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Depending on your specific project and business needs, you may engage a number of other vendors. This may include things like signage for your office lobby, office artwork, office security systems and more.
Each of these will have their own costs associated with them, and your project manager can help you determine what vendors you will need to engage and help estimate these costs.
How to Budget for Your First Year of Leasing a New Office Space
Now that you know what real estate related costs you can expect to encounter in your first year of occupying a new office, here’s how to calculate your estimated costs.
[(Base Rent + Op/Ex) * RSF]
|– Free Rent
Monthly Base Rent * # of Months of Free Rent
|+ Equipment Maintenance
|+ Submetered Power
|+ Security Deposit
+/- 1 Month Gross Rent
|+ Parking Fees
Parking Rate * # of Spots * 12 Months
|+ Legal Fees
To be negotiated with your legal team
|+ Build-Out Costs
Hard & Soft Costs (that exceed TI Allowance)
To be estimated by your project manager
|+ Data Cabling, WiFi & Technology
Typically both an installation/set up fee and a monthly rate
|+ Vendor Costs
Typically a percentage of your project cost
|+ Moving Costs
Est. $1.00 – $1.50/sf + any à la carte services
|+ Additional Costs|
|= Total Year 1 Real Estate Expenses|
Many of these fees will be one-time, upfront costs that do not reoccur throughout the life of your lease. The costs you should anticipate continuing to pay for each year include:
- Base Rent
- Operating Expenses
- Equipment Maintenance
- Submetered Power
- Parking Fees
- WiFi & Technology Monthly Payments (plus any renewal fees if the contract does not cover the full term of your lease)
The last thing you want is to encounter unexpected costs during the first year of your lease.
Hopefully, after reading this article, you have a good understanding of what expenses to plan and budget for during the first year.
We recommend enlisting a qualified tenant representation broker and project manager to get the best estimate of what expenses you will experience based on your specific project and requirement.
If you’re ready to start your search for office space, read our Ultimate Guide to Finding Office Space.
Or, if you’d like to continue learning about leasing office space, check out these helpful articles:
- How Much Does It Cost to Use a Tenant Representation Broker?
- How Much Office Space Do I Need? (Calculator & Per Person Standards)
- How Much Does It Cost to Lease Office Space in Austin, Texas? (Rental Rates, Pricing)