Calculating Total Cost of Occupancy (TCO) for an Office Lease: 7 Costs You Need to Check

When evaluating an office space lease, most tenants want to know the cost per square foot. This number is helpful, but in reality, a building’s base rent may not actually be the most important number. While it does play a role in the total cost of a building, base rent may only make up 1/2 – 2/3 of the total occupancy cost of a building. Unfortunately, many tenants overlook the hidden lease costs (maintenance, taxes, utilities, etc.) that can skew budget forecasting and distort the actual cost comparison between two properties.

Calculating the total cost of occupancy gives you a much more realistic view of the true cost of renting an office space. TCO includes not only base rent, but also operating expenses, utilities, administrative costs, future rent escalations, and more. Understanding total cost of occupancy (TCO) allows you to make smart leasing decisions, budget accurately, and negotiate more efficiently.

What metrics go into the total cost of occupancy, and how do you effectively calculate TCO to compare lease options? Let’s jump into the key components of the total cost of occupancy and how to use them.

What Is Total Cost of Occupancy (TCO)?

Total cost of occupancy (TCO) in commercial real estate is the sum of all of the costs of occupying a property, not just base rent. TCO also includes other occupancy costs such as property taxes, insurance, maintenance costs, CAM fees, utilities, parking and amenities, and future rent escalations.

TCO is a crucial metric to understand for comparing possible leases, evaluating the true cost of a property, and effectively negotiating favorable lease terms.

For example, a Charlotte office might rent for $30/sq/yr. However, it’s not uncommon for operating expenses (property taxes, CAM, insurance, utilities) to cost another $10/sf/yr, bringing the total cost up to $40/sf/yr.

(And this example doesn’t even include parking fees, management costs, or future rent escalations.)

In this case, base rent only accounts for 75% of the total cost of a building. Later in this article, we’ll explore two more in-depth examples of how to calculate TCO and see the impact it has on overall pricing.

Why TCO Matters for Large Office Leases

Calculating TCO is vital for understanding the true cost of a space when comparing office buildings to lease. But it does more than just equip you with the numbers you need to find the best lease opportunity. It also gives practical insights for long-term budgeting, allows for effective financial management and strategic planning, provides financial transparency, and helps keep expenses down.

• Impact on long-term budgeting. Understanding TCO in a commercial property lease helps office tenants prevent budget overruns over the lifetime of the lease. But more than just accurately tracking costs, knowing TCO can also help you improve operational efficiency by giving a clear picture of where occupancy costs can be minimized and where funds are being wasted. This may include evaluating maintenance contracts, repurposing underutilized space, negotiating management fees, or upgrading to energy-efficient lighting.
• Financial transparency for stakeholders. For corporate tenants, clear accounting of occupancy costs creates transparency with stakeholders. TCO gives decision-makers valuable insights to understand how revenue is allocated and boosts stakeholder confidence.
• Avoiding hidden costs and unexpected fees. When tenants focus solely on base rent, hidden costs and additional expenses can escalate quickly, slashing through profitability and impacting cash flow. When evaluating a commercial property lease, tenants often overlook additional costs, including CAM, insurance, utilities, and taxes. In addition to base rent and operating costs, other factors that can play a major role in determining the value of a lease include free rent or moving allowances, tenant improvement allowance (TIA), and the condition of the building. Another factor that tenants often glance over is future rent escalations or CPI increases, which can have a significant impact on the TCO in the long term.

7 Key Components of Total Cost of Occupancy

We’ve touched on the different components that go into calculating TCO. Now let’s take a closer look at exactly what each one means.

1. Base Rent

Base rent is the main fixed cost of an office lease, typically presented as price per square foot per year. This is the amount that a tenant agrees to pay the property owner to lease a commercial building. In most cases, base rent will escalate annually. This can take place through fixed increases, Consumer Price Index (CPI) adjustments, or pass-through clauses.

When examining an office space listing, base rent is often the most prominent number tenants look at. However, as we’ve seen, it’s only part of the occupancy cost.

2. Operating Expenses (OpEx)

Operating expenses may be paid either by the landlord or by the tenant, depending on the type of lease. This is an important distinction to make when examining lease options.

In a triple net lease, the tenant takes on most or all of the operational costs, while in full-service/gross leases, the landlord absorbs the responsibility.

Operating expenses include:

• Common Area Maintenance (CAM). CAM consists of the costs to maintain the building’s common areas, such as lobbies, hallways, elevators, stairwells, shared entrances, parking lots, and exterior spaces.
• Property taxes. Property taxes can vary significantly by location and property valuation.
• This includes the tenant’s share of insurance premiums, which cover the property and liability risks.

3. Utilities and Services

Utility costs and services such as electricity, water, heating/cooling, internet service, and waste disposal all add to the monthly cost of occupying a building. In this case, the lease type again determines whether the tenant pays directly for these services or they’re passed through by the landlord.

Keep in mind that utility costs typically increase over time. In addition, they can vary significantly from building to building. A well-insulated, new building with energy-efficient systems may have much lower utility costs than an older building with old rooftop units and inefficient systems. Facility usage can also greatly impact utility costs.

4. Maintenance and Repairs

Maintenance and routine upkeep of a building can include everything from major repairs of damaged infrastructure to daily janitorial services. Depending on lease negotiations, these costs may be included in CAM or charged separately. While not always the case, older buildings can be more prone to higher costs.

5. Parking and Amenities Fees

Many commercial space leases include fees for tenant parking and access to office amenities, such as fitness centers, conference rooms, or on-site dining, especially in multi-tenant buildings.

These fees may be fixed or variable, based on usage, and add to the overall cost of the building annually.

6. Management and Administrative Costs

The lease agreement may also incur fees related to property management, administrative overhead, building security, and possibly legal or accounting costs passed through to tenants.

7. Future Rent Escalations / CPI Increases

Rent escalation is common in commercial leases, as it covers the landlord in a world of rising costs.

Escalation clauses are typically either fixed increases (annually or bi-annually), percentage increases (a percentage increase per year), market rent increases (based on the local market), or CPI (Consumer Price Index) increases (tied to inflation).

Understanding rent escalations will allow you, as the tenant, to understand how much rent will rise over the life of the lease.

How to Calculate Total Cost of Occupancy of an Office Lease

Once you understand the additional costs associated with leasing your office building, calculating the total cost of occupancy isn’t difficult. Simply add up all of the costs and multiply them by the total usable square footage to find the total annual cost.

Your formula should look something like this:

TCO = (Base Rent + OpEx + Utilities + Maintenance + Other Fees)

Let’s look at two examples:

Example 1: Class A Uptown Office Tower on S. Tryon Street

• Base Rent: $40 per sq. ft.
• Operating Expenses (OpEx – CAM, property taxes, insurance): $12 per sq. ft.
• Utilities: $4 per sq. ft.
• Maintenance and Repairs: $2 per sq. ft.
• Other Fees (parking, amenities, administrative): $3 per sq. ft.
• Total Usable Sq. Ft.: 25,000 sq. ft.

Calculation:

TCO = (40 + 12 + 4 + 2 + 3) = $61 per sq. ft. annually

Total Annual Cost: 25,000 × $61 = $1,525,000

In this example, even though base rent is high, it represents only about 65% of the total occupancy cost. Premium amenities, downtown utilities, and structured parking drive the total well above the stated rent.

Example 2: Class B Suburban Office in Ballantyne or University City

• Base Rent: $28 per sq. ft.
• Operating Expenses (OpEx): $10 per sq. ft.
• Utilities: $5 per sq. ft. (older HVAC systems)
• Maintenance and Repairs: $4 per sq. ft. (aging building)
• Other Fees (surface parking, admin, amenities): $2 per sq. ft.
• Total Usable Sq. Ft.: 25,000 sq. ft.

Calculation:

TCO = (28 + 10 + 5 + 4 + 2) = $49 per sq. ft. annually

Total Annual Cost: 25,000 × $49 = $1,225,000

Although this building’s base rent is 30% lower than the Uptown property, higher operating and maintenance costs shrink the cost advantage. Base rent here represents roughly 57% of the total occupancy cost—showing that ancillary costs can dramatically affect real savings.

How to Compare TCO Across Multiple Lease Options

When comparing TCO across multiple lease options, there are a few factors you need to keep in mind:

• Adjust for lease term. Some leases include free rent periods, rent escalations, or step-ups over time. Be sure to convert multi-year costs into an annual total, and don’t forget to account for rent escalations and tenant improvement allowances.
• Factor in usable vs. rentable square footage. Rentable square footage includes the usable area plus a share of common areas. Two buildings can have the same amount of rentable square feet but different usable areas. Review the property’s load factor (the ratio between rentable and usable area) to find hidden square footage costs.
• Annualize costs for apples-to-apples comparison. Different properties may structure payments differently. While one might bill CAM charges monthly, another bills annually and includes utilities in rent. To compare fairly, convert all recurring costs into an annual per-square-foot basis and adjust one-time costs (move-in, build out, etc.) by amortizing them over the lease term.

Need Help Finding the Perfect Charlotte Office Space?

Total cost of occupancy is one of many important factors that go into selecting the right office space. Calculating TCO, choosing the right amenities, deciding how much square footage you need per employee, and choosing between a traditional or serviced office lease are all important factors in the decision-making process. If you feel overwhelmed by the options or aren’t sure how to find the information you need, let us help.

At Regent Commercial Real Estate, we’ve worked with hundreds of business owners and decision-makers in the greater Charlotte area to buy, sell, and lease commercial properties. In addition to high-level real estate credentials, what sets us apart is a genuine interest in each client’s situation.

Ready to find your next Charlotte office space? We’re here for you. Contact us today, or request your free customized market report to get a shortlist of properties that fit your needs.