How to Budget Total Occupancy Cost for a New Office

Our guide to what office space really costs lists the components of occupancy cost. This guide is about the next step: arranging them into a model that answers questions. A list tells you what to expect. A model tells you how much cash leaves the bank in a given month, what the office costs per employee, and what happens if your hiring plan is wrong.

The structure is simple. Put months across the top, from today through the last month of the proposed term. Put cost lines down the side, grouped into one-time and recurring. Fill it from the landlord’s proposal, the contractor’s estimate and vendor quotes. A spreadsheet is enough. What makes it useful is that every figure has a source and a date, so you can update it as proposals change.

One-time costs cluster at the start of the lease and again at the end. Startups reliably budget the first group and forget the second.

• Build-out cost above the landlord’s allowance, including design and engineering fees, permits and any landlord supervision fee.
• Furniture, cabling, network equipment, audiovisual systems, access control and signage.
• The security deposit or the cash collateral behind a letter of credit. This is not an expense, but it is cash you cannot use.
• Moving costs, IT cutover and any overlap period when you pay for two spaces.
• Legal fees for lease review and any project management fees.
• Exit costs at the old space: restoration, cabling removal, repairs and cleaning required by that lease.
• Exit costs at the new space at the end of the term, which the lease you are about to sign will define.

Timing matters as much as the totals. In a tenant-built project you often pay the contractor first and receive the allowance from the landlord afterward, sometimes only after the work is finished and paperwork is delivered. Model the gap. A project that is fully funded on paper can still strain cash for a period.

Recurring costs run for the whole term and change over it. Model each line by month, since few of them stay flat.

• Base rent, with the scheduled escalations and any free rent period shown in the months where they apply.
• Your share of operating expenses and real estate taxes, or the increases over a base year, depending on the lease structure.
• Utilities billed separately, including electricity for the suite and any after-hours heating and cooling charges.
• Parking, storage and amenity fees.
• Janitorial service if it is not included, plus supplies, repairs and maintenance contracts for equipment you own, such as a dedicated cooling unit.
• Internet and telecom circuits.
• Insurance required by the lease.
• Letter of credit fees, if you post one.

Two lines deserve an explicit assumption because the landlord cannot tell you what they will be. Operating expenses and taxes are estimates that get reconciled against actual costs each year, so pick a growth assumption and write it down. After-hours cooling depends on how your team works, so estimate usage from real behavior. Ask the landlord for the building’s recent history of operating expenses and taxes so your assumption has a basis.

A lease looks different to the person managing the bank balance than to the person preparing financial statements. Build both views, since each answers a different question.

The cash view shows payments in the months they happen. Free rent appears as months with no rent. The deposit appears as an outflow at signing. Build-out spending appears early, and the allowance appears when the landlord pays it. This is the view that tells you about runway.

The accounting view follows the rules your CPA applies. Under US accounting standards, rent expense on a typical office lease is generally recognized evenly across the term instead of as it is paid, so months of free rent still show an expense. Build-out costs you fund are generally capitalized and depreciated, and most leases are recorded on the balance sheet. How the allowance, the deposit and any restoration obligation are treated depends on the facts. Confirm the treatment with your CPA before you present figures to your board or lenders.

Free rent improves cash early and does little for reported expense. If your board watches burn and your lenders watch covenants, show them both views so nobody is surprised by the difference.

An office is close to a fixed cost. Rent does not fall when hiring slows. That makes cost per employee the most sensitive figure in the model, and the one a growing company most needs to see.

Take the conservative, expected and stretch hiring cases from your space plan and run the model under each. In the conservative case, occupancy cost per person rises and the office takes a larger share of spending. In the stretch case, the question changes: when does the space fill up, and what does the next block of space cost?

1. Enter headcount by month for the conservative, expected and stretch cases.
2. Calculate occupancy cost per employee and as a share of operating spending for each case.
3. Find the month the space reaches capacity in the stretch case, using the seat count from the test fit.
4. Price the response to each case: expansion space or a second location if you grow, a sublease or termination right if you shrink.
5. Add a case for the things outside your control, such as higher operating expenses or a delayed move-in with holdover rent at the old space.
6. Check the worst case against your runway, including the cash tied up in the deposit.

The exercise usually changes what you negotiate. If the conservative case is uncomfortable, flexibility is worth paying for: a shorter term, a termination right or strong sublease language. If the stretch case fills the space early, expansion rights matter more than another month of free rent.

Run the same model for every finalist. Proposals differ in ways that make side-by-side reading unreliable: one building quotes a lower rent and a smaller allowance, another offers more free rent and passes through more expenses. Putting each into the same structure turns them into comparable totals, both in cash and per employee. Our guide to net effective rent covers the standard way to express that comparison.

Keep a short list of assumptions at the top of the model so anyone reading it can see what you assumed.

• ✓What term and commencement date does each scenario assume?
• ✓What growth rate did we assume for operating expenses and taxes, and what is it based on?
• ✓What contingency is included in the build-out estimate?
• ✓When do we expect to receive the allowance, and what do we have to deliver first?
• ✓How much cash is tied up in the deposit or letter of credit, and does it reduce over time?
• ✓What did we assume for after-hours cooling and separately metered power?
• ✓What end-of-term costs have we included for restoration and moving out?
• ✓Has our CPA reviewed the accounting view?

TAG prepares financial comparisons of competing proposals for clients as part of tenant representation, and the model above is the framework those comparisons feed. This guide is general information, not accounting or tax advice.