Understanding the Economics of a NYC Lease

For most companies, the cost of their office space ranks second only to salaries. Consequently, a thorough grasp of a lease’s financial terms is paramount to a company’s profitability. Let’s break down the standard economic components of a New York City lease:

Class A Buildings: A More Streamlined Financial Structure

In the realm of Class A office towers, where rents command a premium, the fundamental financial aspects of a lease tend to be more direct:

1. Base Rent: This is the foundational rent obligation, typically expressed annually, monthly, or per square foot.
2. Additional Rent: Covering Operational Costs Over Time: This category accounts for increases in the landlord’s building expenses:
   • Operating Escalation: Can manifest as a proportionate share of rising operating costs or a predetermined annual increase to the base rent (e.g., 3% annually).
   • Real Estate Tax Escalation: The tenant’s pro-rata portion of any increases in the building’s property taxes.
   • Electric: Usually billed separately, with three common methods: 
     1. Direct Meter: Tenant pays the utility company directly for their consumption.
     2. Submeter: Landlord bills the tenant for actual usage based on a submeter reading, typically adding an administrative fee (5%-8%) to the utility’s cost.
     3. Flat Rate: A fixed charge per square foot (typically $3.25 – $3.50).
   • After Hour HVAC: Usage of the heating, ventilation, and air conditioning systems outside standard business hours (usually Monday-Friday) incurs an additional charge.
   • Cleaning: Typically included within the base rent and not a separate tenant expense.

Class B & C Buildings: Navigating Additional Operational Expenses

While the core economic elements (Base Rent, Additional Rent, Electric) remain similar to Class A buildings, older Class B and C properties often operate on a less comprehensive service model, leading to supplementary charges that tenants must carefully consider:

• Base Rent, Additional Rent, Electric: As outlined for Class A buildings.
• Office Cleaning: Unlike Class A, tenants in B & C buildings generally contract directly with a cleaning service (potentially costing $2.00 – $3.00 per sq ft) and a rubbish removal service (around $.15 – $.50 per sq ft).
• Water/Sprinkler Charge: Landlords in these building classes frequently pass on a separate charge for water and sprinkler system upkeep, ranging from $.25 – $.50 per sq ft.
• Security Guard: Similar to water charges, a portion of the building’s security costs may be levied on tenants, typically between $.25 – $.50 per sq ft.
• AC Maintenance: Tenants in B & C buildings often have their own independent AC units. While this offers control over usage, it also means the tenant is responsible for maintenance and repairs, the cost of which can vary significantly based on the unit’s size and complexity.

By understanding these distinctions, businesses can more accurately assess the true cost of leasing space in New York City and make informed decisions that align with their financial objectives.

I’d be happy to discuss your commercial real estate requirements and share my extensive experience in representing both tenants and landlords.

Paul Walker 212-984-7117

 Paul.Walker@cbre.com

(Paul Walker | LinkedIn

A commercial real estate broker specializing in all facets of office leasing for over 30 years, I’m also a proud native New Yorker with a deep love for this city. My commitment to my community is reflected in my founding of two real estate charity events and consistent involvement in professional organizations. Outside of work, I enjoy live music, movies, basketball, tennis, podcasts, and a continuous pursuit of knowledge, especially regarding history and the fascinating story of New York.