Encyclopedia
Occupancy cost
The total cost of occupying space, including basic rent, additional rent and other costs.
For example: A retailer compares occupancy cost to sales. (Illustration only, not a real deal.)
This is a general industry term with no single official definition. Your lease or contract wording controls.
Example only, not a real client. Say you compare two retail units. One has lower base rent but high operating costs and a percentage rent clause; the other has higher rent and lower costs. Adding up rent, costs, taxes and utilities for each shows the second is cheaper to occupy.
What I’d tell a friend
Compare spaces on total occupancy cost, not base rent. That is the number that hits your bank account.
Why it matters to you
It's rent plus everything else you pay to be in the space. Compare spaces on this number, and check it against your sales, because a space that looks cheap on rent can cost more once costs and taxes are added.
How to use it in your deal
Tenants should calculate occupancy cost for every option over the full lease term, including expected cost increases, and compare it with projected revenue. For retail, check whether the occupancy cost to sales ratio is sustainable for your business type. Include costs that leases sometimes leave out of listings, such as management fees, insurance and utilities.
Landlords use occupancy cost ratios to judge whether tenants can afford rent. Buyers should check retail tenants' occupancy costs for risk of default. Ask landlords for actual operating cost history for the last two or three years, since estimates are often low. Add your own costs to use the space, like insurance, security, cleaning, internet and the amortized cost of your build-out, to see the full picture.
A slightly pricier unit with better visibility or lower operating costs can be cheaper overall. Revisit the numbers at each renewal and when you're thinking about expanding. Put every space you compare on one sheet with the same line items.
Mistakes I see
Comparing base rent only. Ignoring escalations. Missing utilities.
In BC and Vancouver
Lease terms govern; Goods and Services Tax (GST) applies to commercial rent.
Tax names used here: Harmonized Sales Tax (HST). The Canada Revenue Agency (CRA) handles federal tax. Official sources: Commercial Tenancy Act (BC Laws) · CRA GST/HST Memorandum 19.4.1
What it means
Occupancy cost is the full cost of being in a space: base rent, additional rent for operating costs and taxes, utilities, and any percentage rent or other charges.
Retailers often compare it with sales to judge whether a location is affordable.
Using it
Ask the landlord for recent operating cost and tax figures, and estimate utilities from past bills where you can.
Add the cost of your fit-out spread over the term, net of any allowance, to see the true yearly cost. I can line this up for you.
Questions to ask before you sign
- What's my total cost?
- How does it compare to sales?
- What escalations apply?
- What's excluded?
Keep reading
Related terms: Additional rent, Percentage rent
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General information for British Columbia only. It isn’t legal, tax, accounting or financial advice, laws and rates change, and reading it doesn’t make you my client. Any numbers or scenarios are hypothetical. Check the linked official source and talk to a lawyer, accountant or other qualified professional before you act or sign anything. See the terms and disclaimer.