A real estate budget is a critical step in the leasing process for tenants looking to buy office space. Brokers who specialize in representing tenants usually create two separate budgets for their clients. One includes upfront expenses incurred before and upon signing the lease, and another lists any potential costs related to the lease itself, such as utilities and property management fees.

Budgeting for Early: Key Categories

The following list provides a general overview. It is a list of significant upfront expenses that we discuss with our clients when searching for office space. In addition, this list can be used as a reference point for tenants. The line items are divided into three main categories: construction-related expenses, lease-related expenses, and move-related costs.

Lease-Related Expenses:

• Rent for the first month.

• Refundable security deposit

• Lease negotiations are subject to legal fees.

Construction-Related Expenses:

• Construction costs.

• Engineering and architecture fees

• Management fees for landlords in construction.

• Permitting fees.

• Tenant project management fees.

Moving Expenses:

• Furniture is changing.

• Existing furniture liquidation.

• Telephone system (new or relocation of an existing)

• Equipment for offices (new or relocated).

• Audiovisual systems.

• Telecom/data cabling, infrastructure

• Security system for suites

• Signage for the suite

• Moving non-furniture and equipment (files or printers, etc.) physically ).

In a companion article, How Much Does It Cost to Build Office Space? You will find descriptions and estimates for many of the above items. This article will cover costs related to architecture, engineering, and construction. These are the items that will account for most of your upfront expenses. The report also includes estimates and insights on the costs of voice and data cabling and security and audiovisual systems. It also covers furniture, moving, and signage.

We will be focusing on three remaining expenses that tenants must budget for (the first month's rent, security deposit, and legal fees). She also shares her insight regarding the negotiation room, and latitude tenants have with each other.

Rent for the First Month

The first month's rent must be paid at the time of execution of your lease. Even if you negotiate for a free period, you should have this amount on hand. This upfront payment is also known as an advance rent payment. Let's suppose I negotiate a 5-year lease. The first six months’ rent is free. The first month's rent will be paid upon execution of the lease. It's then applied to the seventh month.

If a broker negotiates a substantial number of months without rent, the tenant must pay at least one month's rent when they execute the lease.

Security Deposit

Landlords of all property types request the security deposit in addition to the first month's rent. After that, the landlord holds the security deposit for the entire lease term in case the tenant defaults or causes damage. The amount can be negotiable and depends on the landlord's transaction costs (e.g., allowances for renovations of the space) as well as the landlord's assessment of a tenant's financial resources. To help the landlord assess the risks involved in the deal and determine a fair amount for the security deposit, financial statements must be submitted when you negotiate the terms.

Security deposits can vary greatly, from zero to the equivalent amount of one year of rent. You may be able to negotiate a smaller security deposit if you work with multinational companies or established firms.

Small tenants have some negotiation room. Depending on the tenant's performance, the amount of the security deposits can be reduced over the term of the lease. An agreement that states that a tenant has not been in default and has paid rent on time for two to three years can be made and recorded in the lease. This allows the tenant to have some of the security deposit refunded while they are still living in the building.

Legal fees For Lease Review And Negotiation

The complexity of your lease and the market in which you live will impact the cost of legal fees. Negotiating a full lease with a new landlord is more complicated than negotiating a renewal of expansion in an existing property. It will be less expensive if it is shorter and has fewer terms and legal terms that must be reviewed and negotiated.

A simple office lease could cost between $3,000 to $8,000 for a legal review. However, depending on the scope and process of construction and the terms and options included in the lease, the complexity of the lease can increase.

The general rule is that the bigger the transaction, i.e., the more square footage a tenant leases, and the longer the lease term, the greater the leverage a tenant has in leasing negotiations, and the more they will scrutinize the terms. Legal fees for these transactions can reach up to $25,000

Scope of Renovation or Construction. Costs will also depend on whether you have a substantial build out requirement. A work letter outlining the construction process can make up a large part of a lease. The work letter is a written statement detailing the build-out process, allowances, contractors engaged, review times, and other pertinent information. It is attached to the lease as an exhibit and must be signed by both the landlord and tenant.

Options. The number of options that can be negotiated and documented in a lease adds to its complexity. These options can include the ability for a tenant to increase or decrease the space they occupy within a building, the possibility of early termination with fees and dates, and renewal options that could lead to lower rents or concessions for the tenant. These options, along with other terms, can be tailored to each transaction.

Negotiating. Negotiating is also important because certain lawyers are more difficult to work with than others. It could also be that more conference calls and redrafts are being sent back and forth, which can lead to higher fees.

Lingering Issues. Every transaction has its own set of issues that can linger beyond the conclusion of the negotiation process. This could include issues such as the buildout, the security deposit, or insurance. You can have it be almost any aspect of your lease. The business terms are not included because they are already negotiated and included in the letter of intent. Sometimes, there are legal issues that are related to language. So the lawyers work back and forth until they are settled.

However, I have never seen a deal that has gone through just two or three iterations. It usually takes at least five to ten iterations back and forth. Sometimes, in the final stages of negotiations, it can be as many as 10.

A Tenant Rep Broker Is An Option

Many tenants focus on monthly rent, not considering transaction costs. This can make it difficult to negotiate. Although tenants can do it themselves, as professionals, we recommend that you engage a tenant representative. Tenant representatives can help tenants manage the complexity of the process by customizing their budget and making recommendations about vendors that will make the cost more affordable.