To successfully negotiate an office lease, there are basic principles and knowledge that you must possess. Without this, you're in for a tough time negotiating terms to your favor and ultimately end up with a less than favorable outcome. There are five key areas that are essential to a successful negotiation and they are outlined below.
Keep in mind, by putting all of your information together and organizing it in a way that enforces your position, you will most surely have a much better chance of reaching an agreement that will give you a better chance of maintaining a long term growth strategy.
To be clear, when I refer to Office, I'm specifically talking about office buildings where the entire building has been built and permitted for office use only and for no other purpose. This will not include a Retail Strip Center that allows office use. That's another negotiation all together and not part of this strategy.
There are some factors that may seem to be common sense, but believe me, many tenants will overlook these items and end up in trouble later on with their leases when their start-up capital is all but exhausted and business isn't panning out as planned. Always bear in mind that you have to be honest with yourself, not only of your own abilities, but with the potential of the market itself. A successful negotiation is one that addresses both of these factors.
These factors include the following:
Keep in mind, by putting all of your information together and organizing it in a way that enforces your position, you will most surely have a much better chance of reaching an agreement that will give you a better chance of maintaining a long term growth strategy.
To be clear, when I refer to Office, I'm specifically talking about office buildings where the entire building has been built and permitted for office use only and for no other purpose. This will not include a Retail Strip Center that allows office use. That's another negotiation all together and not part of this strategy.
There are some factors that may seem to be common sense, but believe me, many tenants will overlook these items and end up in trouble later on with their leases when their start-up capital is all but exhausted and business isn't panning out as planned. Always bear in mind that you have to be honest with yourself, not only of your own abilities, but with the potential of the market itself. A successful negotiation is one that addresses both of these factors.
These factors include the following:
1. What’s your Budget? This may seem like a simple question, but really, what’s your budget? And a budget is not something to gloss over or create haphazardly after a few minutes of crunching numbers. You really have to work on a figure that is realistic and manageable. Why? The more honest you are with this number, the more effective you will be in negotiating your terms.
a. With a known budget, you will be less tempted to negotiate terms that you know you can’t afford.
b. This will come across in your negotiations and you will be better able to explain why your offer came in at that number.
c. You won’t waste your time with buildings that are way over your budget.
d. If the offer is rejected, your options are much clearer on whether to walk away or negotiate other terms on the lease that may be equally as important.
2. Know the terms: If you don’t know the lingo, it’s going to be tough to know what to watch out for. Click here for a comprehensive list of Commercial Terms. Here are a few of the more common terms you'll be dealing with.
a. Full Service: These leases normally include power, water, janitorial, and possibly even internet service with your base rental rate.
b. NNN Lease or any combination of Modified Leases: Watch out for those pass through expenses. Once a lease is signed, it's too late to renegotiate.
c. Common Area Factor: This is a topic I could write an entire article about and should, considering what I've seen. Some offices will add a Common Area Factor on a price per sf format in addition to your base rent to account for Common Areas. For example, if your base rent is $20 per foot, the Common Area Factor could be another $1.50 per foot.
d. Physical vs Leasable SF or (Usable vs Rentable) Again, this is a follow up to Common Area Factor. You are going to find landlords that will advertise 1,000 sf of space, when in fact, the space is only 700 sf. Why? This is the difference between Usable and Rentable. They add the same area calculated for a Common Area Factor figure on top of the usable sf area. In essence, instead of getting a price per sf just for the usable space you are leasing, you are getting a price including this Common Area Factor sf area.
Why? There are a couple of reasons. The first is obvious. The landlord can advertise the space for far less than if the usable sf figure was used. Second, a landlord can in fact rent out space outside of the usable space, including hallways. The problem is when the space is advertised with a rentable sf amount and there is no mention of the usable sf figure. When searching for office space, this makes it quite challenging since a tenant will always base their sf needs on usable not rentable.
This is something that I've battled with for years but it's important to note the difference. In other words, the usable area is being diluted in the marketing. This is not to say that a landlord can't rent the space based off of the rentable sf area, but the usable sf area needs to be identified, especially when you are negotiating. After all, you're not going to pay the same price per sf for a hallway as you would for your own private office.
Although I've seen this happen in some larger spaces, this is most common in smaller spaces, especially executive offices. I've literally been to offices advertised with 400 SF and it’s only a 10’ x 20’ space. Don’t take what you're being told at face value. Not all landlords are equally as forthcoming with information so it's crucial to not only know about this distinction but ask the right questions. This is an issue that I will address in more detail in future articles. Be sure to check back soon for updates.
3. Put together a proper Letter of Intent. See (How To Write An Effective Letter Of Intent) Without a well written LOI, your negotiations will suffer. Take the time to read through the points and make sure you cover all aspects of that LOI.
4. Finishes and Delivery Condition: Many offices will deliver the space in optimal and if not semi-custom condition. Offices are much different than retail space in the sense that Retail will almost surely be delivered As-Is. Office spaces tend to cater a bit to the tenant and you can negotiate to have a space delivered in a condition where you may not have to do much at all except for moving in your furniture. Just keep in mind the following:
a. Office spaces will almost surely deliver the space with new carpeting, paint, and in move-in condition.
b. If you need a wall moved, added, or removed all together, it is not uncommon for office buildings to do this for you at no charge.
c. If in doubt whether they will do something for you, ask. The worst that could happen is they say no.
d. If negotiating a space in a new building under construction or recently constructed, chances are you will be able to get a tenant allowance for building out the space on behalf of the landlord. This would include the cost of the bear minimum to have an operating space, i.e. walls, electrical, A/C, bathroom, basic finishes etc. Although the landlord may have a set number in mind, this area is negotiable.
5. And finally, you ALWAYS need Free Rent. Why?
a. Move in and set up time.
b. Applying for municipal licenses.
c. Staffing
d. Existing lease hasn't expired yet and you’re leasing the space early to secure a good location.
e. The alignment of the planets. (you get the picture)
f. Always ask, you’d be surprises what you can get.
g. Typical is 30 days with minimal investment on either side. However, on larger deals or deals which include considerable tenant improvements, you can extend the rent over several months. As an example, if you have to permit the space and do a full remodel, it could take you 6 months just to get drawings completed and a permit pulled. That’s not even considering construction time which could easily take another 90 days.
In summary, these tools have helped me greatly in many lease negotiations. However, they are not the end all of what you need to finalize a lease. Every situation will demand its own requirements and set of guidelines. However, these 5 topics I just covered are essential in every single negotiation you will have and can save you thousands if negotiated properly.
Remember, always plan ahead and be honest with yourself and your budget. Create your own ideal situation that will allow your business to thrive and then go out and try to bring in the deals that most closely match or exceed your expectations. And finally, if the building doesn't provide acceptable terms no matter how many times you've gone back and forth, then it’s time to walk away. There is always something else that will work. You just have to find it.
And keep in mind, if you know of anyone that is in the process of leasing a new office space, I would love the opportunity to consult with them free of charge and help in any way I can.
www.allrealtymanagement.com
a. With a known budget, you will be less tempted to negotiate terms that you know you can’t afford.
b. This will come across in your negotiations and you will be better able to explain why your offer came in at that number.
c. You won’t waste your time with buildings that are way over your budget.
d. If the offer is rejected, your options are much clearer on whether to walk away or negotiate other terms on the lease that may be equally as important.
2. Know the terms: If you don’t know the lingo, it’s going to be tough to know what to watch out for. Click here for a comprehensive list of Commercial Terms. Here are a few of the more common terms you'll be dealing with.
a. Full Service: These leases normally include power, water, janitorial, and possibly even internet service with your base rental rate.
b. NNN Lease or any combination of Modified Leases: Watch out for those pass through expenses. Once a lease is signed, it's too late to renegotiate.
c. Common Area Factor: This is a topic I could write an entire article about and should, considering what I've seen. Some offices will add a Common Area Factor on a price per sf format in addition to your base rent to account for Common Areas. For example, if your base rent is $20 per foot, the Common Area Factor could be another $1.50 per foot.
d. Physical vs Leasable SF or (Usable vs Rentable) Again, this is a follow up to Common Area Factor. You are going to find landlords that will advertise 1,000 sf of space, when in fact, the space is only 700 sf. Why? This is the difference between Usable and Rentable. They add the same area calculated for a Common Area Factor figure on top of the usable sf area. In essence, instead of getting a price per sf just for the usable space you are leasing, you are getting a price including this Common Area Factor sf area.
Why? There are a couple of reasons. The first is obvious. The landlord can advertise the space for far less than if the usable sf figure was used. Second, a landlord can in fact rent out space outside of the usable space, including hallways. The problem is when the space is advertised with a rentable sf amount and there is no mention of the usable sf figure. When searching for office space, this makes it quite challenging since a tenant will always base their sf needs on usable not rentable.
This is something that I've battled with for years but it's important to note the difference. In other words, the usable area is being diluted in the marketing. This is not to say that a landlord can't rent the space based off of the rentable sf area, but the usable sf area needs to be identified, especially when you are negotiating. After all, you're not going to pay the same price per sf for a hallway as you would for your own private office.
Although I've seen this happen in some larger spaces, this is most common in smaller spaces, especially executive offices. I've literally been to offices advertised with 400 SF and it’s only a 10’ x 20’ space. Don’t take what you're being told at face value. Not all landlords are equally as forthcoming with information so it's crucial to not only know about this distinction but ask the right questions. This is an issue that I will address in more detail in future articles. Be sure to check back soon for updates.
3. Put together a proper Letter of Intent. See (How To Write An Effective Letter Of Intent) Without a well written LOI, your negotiations will suffer. Take the time to read through the points and make sure you cover all aspects of that LOI.
4. Finishes and Delivery Condition: Many offices will deliver the space in optimal and if not semi-custom condition. Offices are much different than retail space in the sense that Retail will almost surely be delivered As-Is. Office spaces tend to cater a bit to the tenant and you can negotiate to have a space delivered in a condition where you may not have to do much at all except for moving in your furniture. Just keep in mind the following:
a. Office spaces will almost surely deliver the space with new carpeting, paint, and in move-in condition.
b. If you need a wall moved, added, or removed all together, it is not uncommon for office buildings to do this for you at no charge.
c. If in doubt whether they will do something for you, ask. The worst that could happen is they say no.
d. If negotiating a space in a new building under construction or recently constructed, chances are you will be able to get a tenant allowance for building out the space on behalf of the landlord. This would include the cost of the bear minimum to have an operating space, i.e. walls, electrical, A/C, bathroom, basic finishes etc. Although the landlord may have a set number in mind, this area is negotiable.
5. And finally, you ALWAYS need Free Rent. Why?
a. Move in and set up time.
b. Applying for municipal licenses.
c. Staffing
d. Existing lease hasn't expired yet and you’re leasing the space early to secure a good location.
e. The alignment of the planets. (you get the picture)
f. Always ask, you’d be surprises what you can get.
g. Typical is 30 days with minimal investment on either side. However, on larger deals or deals which include considerable tenant improvements, you can extend the rent over several months. As an example, if you have to permit the space and do a full remodel, it could take you 6 months just to get drawings completed and a permit pulled. That’s not even considering construction time which could easily take another 90 days.
In summary, these tools have helped me greatly in many lease negotiations. However, they are not the end all of what you need to finalize a lease. Every situation will demand its own requirements and set of guidelines. However, these 5 topics I just covered are essential in every single negotiation you will have and can save you thousands if negotiated properly.
Remember, always plan ahead and be honest with yourself and your budget. Create your own ideal situation that will allow your business to thrive and then go out and try to bring in the deals that most closely match or exceed your expectations. And finally, if the building doesn't provide acceptable terms no matter how many times you've gone back and forth, then it’s time to walk away. There is always something else that will work. You just have to find it.
And keep in mind, if you know of anyone that is in the process of leasing a new office space, I would love the opportunity to consult with them free of charge and help in any way I can.
www.allrealtymanagement.com
written by: Victor A. Abreu