The process of leasing office space of is complicated, time consuming and often risky. Leasing commercial office space, whether for a relocation, renewal, expansion or contraction is an important business decision that creates future expenses. The cost of facilities is second only to employees salaries and wages. The lease document needs to accurately define the proposed costs.
Before you negotiate for office space, consider these ten tips.
Consider proximity to current as well as future employees. Is visibility important? Do you receive lots of client visits where easy directions are important? Do you need a specific city or county mailing address? Is it critical to maintain your current phone number?
- How much office space does your business really need?
Leasing too much space can be expensive, costing thousands of dollars per year. On the other hand, leasing too little space can also be a serious problem that can impede your future growth. You can get a handle on your space needs by engaging an experienced Space Planner to prepare a Space Program. The Space Program will help identify the space needed by various departments and work groups in your business. You may be able to identify future growth needs and structure your lease to accommodate future expansion needs.
Special needs include heavy parking, fiber optic telecom connections, redundant or back-up power feeds, back-up emergency generators, exterior signage, above standard electrical power or heating, ventilation and air conditioning, high ceilings, specialized lab or clean room equipment. It is critical to identify your requirements early because these issues may be impossible or very expensive to address later. The absence of just one of these highly variable factors may eliminate an otherwise acceptable building. Don't wait months into the process.
- Type of building or office space
What kind of image do you want to project to your clients? Do you prefer a traditional multi-story office building with a common lobby entrance and shared restrooms or would you prefer a single-story facility with a separate entrance and a drive-in door in the back? Traditional office buildings offer space on a Rentable Square Foot basis while utilizing a Load Factor of approximately 15% to 25%. This "Load" is added to the Usable Square Footage of the actual area you occupy and accounts for the square footage of the shared building lobby, hallways and restrooms. In a single-story building Tenants have their own entrances and typically provide their own restrooms inside their premises so a very low or no Load is added.
- What is included in the rental rate?
Buildings are priced using different methods. Many office buildings offer leases on a "Full Service Gross" basis which means that the quoted price per square foot per year includes all "Building Operating Expenses," i.e. property taxes, insurance, common area maintenance, janitorial services and utilities. These buildings usually offer a "Base Year" for Operating Expenses with the Tenant paying for annual escalations (increases) that exceed the cost of Operating Expenses in the Base Year, which is most often the calendar year when the lease begins.
Other buildings offer Tenants what is called a triple net ("NNN") lease. In a NNN lease, the Tenant pays a Base Rent, plus all Operating Expenses for property taxes, insurance and common area maintenance. In a NNN lease, the Tenant usually contracts for and pays separately for its own janitorial and utilities. It can get confusing though, because some Landlords structure their office leases in a hybrid fashion by using a combination of Gross and NNN methods. The important thing is to understand exactly who is paying for what and to make sure that this is clearly described in the lease document.
- Low rates in the first year of the lease term
Most office leases have provisions that allow annual increases that may be predetermined or may float with the changing Consumer Price Index ("CPI"). A building's Operating Expenses will also escalate annually but a smart Tenant can sometimes negotiate a "cap" or ceiling on such increases. Make sure that you understand the proposed escalations for both the Base Rent and the Operating Expenses and then project and budget for these costs as you proceed through the term of the lease.
It is rare to find space that fits your requirements. There is usually some interior construction required to reconfigure the space for your use. Such construction is known as Tenant Improvements ("TIs"). These TIs can range from relatively simple new paint and carpet to extensive new construction.
Be clear before the lease is signed on how much responsibility the Tenant will have for these costs. Landlords typically offer a TI Allowance. The TI Allowance is subject to negotiation and usually increases with the length of the lease term. Additional TI Allowance can often be supplied by the Landlord, but it will likely be amortized at an above market interest rate, usually 8% to 12%, over the term of your lease. Be sure to understand if the Tenant or Landlord will manage the construction and who will be responsible for unexpected delays or building code issues that may arise. It is imperative to get preliminary bids to construct the space prior to negotiating the TI Allowance.
- Negotiate negotiate negotiate
Compared to a building purchase, which is a one-time event, an office lease creates a long-term relationship. Both parties assume on-going responsibilities and liabilities as defined by the lease document. Landlords write leases to be heavily slanted in their favor over a wide range of issues, such as Operating Expenses, TI build-out provisions, liability and insurance matters and Tenant default provisions. The lease can be thoroughly negotiated, much more than you'd expect. If you want a more equitable lease, having the right Tenant Rep and an experienced Real Estate Attorney on your team will make all the difference.
In your search you will come across direct leases offered by Landlords and subleases offered by current Tenants, who are looking to unload all or part of their current leased space. Subleases can offer attractive opportunities, such as free or inexpensive furniture, phone systems and greatly reduced rental rates. Understand that a Sublease creates a direct relationship with the existing Tenant, as well as an indirect relationship with the Landlord holding the master lease.
Issues can arise if the primary Tenant goes into default during the term of your sublease. Most subleases are offered "as-is," i.e. without a TI Allowance to offset your construction costs. Depending on the financial strength of the primary Tenant, it may be better to suggest the primary Tenant seek a "buy-out" of its current lease from the Landlord. This will free up the space so that you can strike a "direct" lease with the Landlord. It may be possible to negotiate that the primary Tenant's lease buy-out will subsidize your new lease via a lower rental rate, free rent or higher TI Allowance.
- Hire an expert Tenant Representative
A Landlord typically pays a leasing commission to his or her Listing Broker whether or not you as the Tenant are represented. Traditional Brokers make their primary living by representing Landlords. You will see many such traditional Brokers signs in front of properties that they are leasing for their Landlord clients. There is a huge conflict of interest when trying to represent the landlord and the tenant, especially if you're looking at properties owned by Landlords that reward the traditional Broker with building listings in the future.
A pure Tenant Representative does not accept listings from Landlords and will push hard to negotiate maximum benefits for your as your advocate.
Expect superior guidance and unbiased advice from a seasoned Tenant Representative.
