While many different factors go into managing your corporate real estate portfolio, occupancy cost analysis is frequently the most powerful tool that you can utilize to control expenditures.
The tenant’s annual occupancy cost is the sum of all costs associated with occupying the space such as base rent, common area maintenance reimbursements, and real estate tax reimbursements. Occupancy cost percentage is the percentage of a tenant’s total gross revenue that goes towards covering the costs of occupying its space.
Occupancy costs have a big effect on the bottom line. Depending on whom you ask, they are usually the second- or third-highest costs of operating a business. Personnel costs are usually first. Occupancy costs rank just before or after tenant improvement (TI) costs. Some companies consider some of TI costs as a part of occupancy costs. You need to be fully aware of what goes into occupancy costs and look for ways to cut them and still deliver all the needs for customer and employee satisfaction.
The Broad Factors
Selecting operationally viable and cost-effective locations. Property location will ultimately determine rental costs based on market conditions.
Structuring transactions that compliment corporate objectives and negotiating equitable financial terms.
Maintaining cost control over the design and construction process through efficient design and construction management.
Some of the specific factors to consider when calculating occupancy costs include:
The amount paid monthly (or variable periods of time) to occupy a commercial space. Rent can be variable as well, with periodic rent increases using different methods. It’s important to know how and when those are factored.
Common Area Maintenance (CAM) charges
These charges may vary but generally include items such as garbage service, parking lot maintenance and landscaping costs. Keep in mind that CAM may fluctuate from month to month, depending on how your lease is structured. For example, when it comes to triple net (NNN) leases, CAM charges essentially represent one of the three nets, and the tenant is responsible for 100% of those charges as defined in the lease.
This often varies depending on the type of lease. In a triple net lease, the tenant is responsible for handling property insurance. In other types of leases, even though your landlord writes the final check to cover the property insurance for your building, you might be responsible for paying a percentage of the bill. In most cases, the amount owed is based upon the amount of square footage your business occupies compared to the overall square footage of the building.
Again, this varies depending on the type of lease. In a triple net lease, the tenant is responsible for handling the property taxes. That being said, cities and other taxing authorities are raising property taxes because of previous sales of properties at record prices. They are basing their rates on the highest possible values to produce more income to cover their costs.
General liability insurance
This is coverage in addition to the property insurance expense and is a must-have. Not only is it necessary to protect your business, but in most cases, it's required as a term of lease agreement.
Except for specific types of leases (gross leases) the tenant will be responsible for all utilities and need to be factored into occupancy cost.
Rising occupancy costs directly impact a company’s earnings, share value and overall performance. Reducing these costs, on the other hand, can increase a company’s profitability because every dollar saved drops straight to the bottom line.
It’s crucial for all parties involved to understand the variables that directly impact the overall cost of occupying a space beyond simply rent.