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August 2018

When Will You Be Moving To Your New "Digs"?

Learning how to achieve a successful practice begins with your first bold and courageous open an office.  Whether you are thinking of opening a practice or expanding to a new out-of-state location, managing the risk of your large investment is pivital to your success.  A major component in making a successful early decision is knowing how to properly evaluate lease agreement proposals.  Guest author Deborah Gill, CPA, FSDA, Chief Strategic Officer, Precision Measurements, Inc. shares a detailed plan to secure the most cost efficient lease agreement.
The leasing of real property (buildings) can be traced as far back as the ancient Egyptians.  It was recognized as a commercial venture in common law hundreds of years before personal property leasing. 

Leasing commercial office space is one of the largest expenses incurred by new and expanding firms, it is important to do your due dilligence.  There are three common forms of lease:  single net lease sometimes shortened to Net or N, and double- and triple-net leases.  The last two are the more common forms of net leases because the majority of the expenses are passed on to the tenant.  It also reduces the risk to the owner as any volatility in oil prices (heating/air conditioning) and property taxes are passed on.  The major expenses that the tenant will pay are the following and in this order:
  • Property Tax - This is straightforward
  • Insurance - This needs to be defined.  Is the lessor insuring just the building?  Are leasehold improvements covered?  The tenant will always insure its own furniture and fixtures, but it is important to know whether the leasehold improvements are insured.  We had been a tenant in a building once for fifteen years before we discovered the lessor was not insuring the millions of dollars we had in leasehold improvements.
  • Maintenance - Even more important to know is what is included in the operating expenses.  At a previous company, we practiced in a building for twenty years, ultimately occupying all of it.  The lease was double net.  The building received all new window flashing, electrical upgrades, and other large repairs during those twenty years of which the lessor was responsible for.  In a triple net lease for one of the offices of our current practice we are charged for HVAC maintenance and assessed for snow removal. 

Investopedia defines the leases as follows illustrating which expenses are paid under each.

  • Single Net Lease:  (sometimes shortened to Net or N), the lessee or tenant is responsible for paying property taxes. 
  • Double Net Lease:  (Net-Net or NN), the lessee or tenant is responsible for property tax and building insurance.  The lessor or landlord is responsible for any expenses incurred for structural repairs and common area maintenance. 
  • Triple Net Lease:  (Net-Net-Net of NNN), is a lease agreement on a property where the tenant or lessee agrees to pay all real estate taxes, building insurance, and maintenance (the three "Nets") on the property in addition to any normal fees that are expected under the agreement (rent, utilities, etc.).  In such a lease, the tenant or lessee is responsible for all costs associated iwth the repair and maintenance of any common area.  As an owner be aware if the tenant does not maintain the property in good condition, there could be deterioratimg conditions requiring repairs cutting into the profits. 

Two more less common lease types are the bondable lease (also called an "absolute triple net lease") where the tenant carries every imaginable real estate risk related to the property including rebuilding after a casualty -- and the ground lease where the landowner leases the land to construct a building. The lessee will then have a leasehold interest in the property and amoritize the leasehold for the expected duration of the tenancy.  The tenant pays what they would pay under a triple net lease and the building reverts back to the owner at the conclusion of the lease.  The Department of Defense does this occasionally. 

If negotiating a triple net lease, do your due dilligence and understand what expenses are typical for the building.  For example, you may be located in the South.  You open an office in the North and are charged for snow removal, something you would have never factored into the lease cost. 

Adopt a spreadsheet approach for each office space you are considering to lease.  Record expenses to be paid for an entire year:

Base Rent

Property Taxes


Operating Expenses

Total Cost

Total Cost/Square Footage = True Rent/Square Foot

You will have a better comparison between spaces (and fewer surprises down the line).

Replicate this spreadsheet with actuals after the lease is negotiated, duplicate it for each year of the lease with projected escalation, and you have your office rent schedule for your auditor. 

Deborah Gill is a Fellow of the Society for Design Administration (SDA), founded more than 50 years ago.  SDA is a national association of managers and administrators employed by design firms to help shape a profitable business environment for A/E firms through education, certification and networking.  The A/E practice manager may oversee the following:  finance, HR, project and practice management, marketing. 

Deborah has carefully walked us through the proper steps to determine where you will successfully practice architecture, engineering, lanscape architect, land surveying, construction management, etc.  We strongly urge you not to overlook your most important personal asset...your individual professional credentials.  You know, the specially framed license on your new office space wall.  Oh yes, one more reminder, are your corporate credentials currently compliant? 

We are available to ensure your professional success providing individual and corporate credentials management services.  For more information, v
isit, or call us at 913-608-7880

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