Occupancy costs are the total amount of property-related expenses paid by a tenant for use of a particular space. Occupancy costs include base rent as well as expense reimbursements paid by the tenant such as CAM charges but excludes business operating expenses such as payroll and sales tax. To calculate a tenant’s occupancy cost, simply add all property-related expenses pertaining to the specific space.
For example, if a tenant occupies 7,000 square feet and pays $14.00 per square foot in base rent plus $3.00 per square foot in CAM charges, then the total annual occupancy costs are $119,000 ((7,000sf x $14.00/sf base rent) plus (7,000sf x $3.00/sf CAM charges)).
Occupancy costs are also used to analyze the potential that a tenant may not renew their lease. Knowing if an anchor tenant within a stripe mall will renew their lease can be critical for the stripe mall's survival. If the anchor tenant leaves, foot traffic can plunge, causing a cascade of vacancies.
To analyze the potential that a tenant may leave, we need to look at the occupancy costs percentage. It can be found by dividing occupancy cost by the tenant’s revenues. The resulting number will show how big of an impact occupancy costs are having on the tenant.
These numbers may be viewed annually. The tenant will need to provide an annual report to the landlord showing sales figures. Such as a request should be built into the lease agreement.
There are a few ways to determine if the tenant may be considering leaving. One is to look for a trend in the occupancy percentage. If it is trending up, the cost of occupying the space is increasing and eating into the tenant’s margin. That’s not a good sign for the longevity of the tenant.
Another method is to look at industry reports for average occupancy costs for different categories of businesses. If the tenant has an above-average occupancy cost and that number keeps moving away from the average without a similar increase in sales, it can be a sign that the tenant's costs for the space are too high.