Electricity fees are determined in one of three ways: direct metering,
sub-metering or flat fee per square foot (typically $3.25/sf/yr). Base asking rents do
not include charges for electricity (unless referred to as "full service").
With direct metering, the tenant receives the electric bill from Con Edison and
pays it directly. With sub metering, the landlord pays the bill and adds
an administrative fee of 7–25%.
The
City Council recently approved a reduction in the CRT, increasing the
minimum taxable rent from $100,000 to $150,000. If annual rent is
above $150,000.00, the tax (from 1.2% to 6%) is due quarterly from the
tenant and a return must be filed. However, there is a tax credit
if annual rent is less than $190k, and in computing the amount of the
tax, there is a 35% reduction. If annual rent is less than
$75,000.00, no return is required. See:
http://www.ci.nyc.ny.us/html/dof/home.html.
All landlords
require proof of insurance (comprehensive general liability business
policy) which provides coverage in the event of property damage or
personal injury on the premises. The amount required can vary
between $500,000 and $2,000,000. While it's customary for the
landlord to be named as an additional insured on the policy, the landlord
should not be named as payee in the event of loss. Your
insurance broker should review those portions of the lease that deal with
property damage, personal injury, and condemnation rights.
The security deposit protects the
landlord against damage to the premises or the failure to pay rent, and is
usually 2 to 4 months' rent (depending upon the financial condition of the
tenant). In some cases, a standby Letter of Credit can be used in
lieu of a cash deposit, but banks can charge up to 10% for the service.
With sole proprietorships or closely held corporations, a personal
guaranty is typically also required. There are two kinds of guaranties:
full and "good guy." With a "good guy" guarantee, the guarantor
remains liable only so long as the tenant remains in possession of the
space. Once the tenant leaves, the guarantor's liability terminates.
Annual increases in
operating expenses and employee wages (Porter's Wages)
are sometimes passed through to the tenant on a proportional basis.
Most landlords today, however, use
the Consumer Price Index or a fixed percentage (3% or 4%) to raise the
annual base rent to reflect increases in operating expenses. In
addition (but not part of the increased base rent), are real estate tax
increases over the base year.
In New York City,
the loss factor varies between 15% to 40%. This means that a 5,000
rentable square foot (rsf) space actually contains 3,250 to 4,250 net
square feet. The difference is designed to account for common areas,
elevator shafts, etc. of the building (although some landlords arbitrarily
increase the rentable square footage to create the illusion of more space
at a lower rental). You should always measure the usable square feet
and compare it with what you're being charged.
The rule of thumb is
to allow 150--250rsf per person subject to the limits below (which assume
some offices, open space with work stations, and typical amenities):
(a) 20 people, allow at least 3400 rentable square feet
(170rsf/person).
(b) 30 people, allow at least 4800 rentable square feet
(160rsf/person).
(c) 40 people, allow at least 5800 rentable square feet
(145rsf/person).
(d) 50 people, allow at least 8000 rentable square feet
(160rsf/person).
A $30/rsf build-out
provides a modest office installation with standard floor covering (often
refinished hardwood floors or commercial grade carpeting) and typical
amenities. Many start-ups and sales-oriented companies choose this
option for cost and business environment purposes (i.e., a modular layout
with open areas accentuated by working groups and stark offices to keep
the sales force on the street)-- which can be very effective if done in
the right hands. Alternatively, if a more conventional office
environment is called for, then begin your cost estimates at $40.00/rsf.
Professional offices are more expensive owing to larger offices, upgraded
materials, and more amenities. We often negotiate the base rent to
include the cost of a New Building Installation, which significantly
reduces up-front tenant costs and amortizes them over the lease term.
If build-out costs are high but the tenancy short, make sure there's a
provision in the lease that allows you to deduct a portion of the rent to
offset the tenant improvements.
Free rent and other
concessions (e.g., build-out subsidies) are affected by supply and demand.
Economic concerns and easing of demand have prompted landlords to be more
responsive to negotiating a variety of issues (including tenant
improvement costs, lease term, security, and free rent), but your broker
must be vigilant to protect your interests. In the current market,
expect 2--4 months free rent.
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