Business

May 21, 2012

How To Save On Your Next Office Lease

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Landlords lease office space 365 days a year. How often do you? Good information is the first step in obtaining a more favorable lease.
 

Your office says a lot about you and your firm. The city, the building, the space, the furnishings are all a part of your brand, so finding a space that is both productive for your employees and inviting to your clients and customers is a big decision.

The average business professional doesn’t spend a lot of time researching office space. His or her research may involve just asking around, or worse, just driving around. This is exactly what landlords want you to do: look a little, see a space, and sign a lease. When this happens, the landlord has all the chips on his side of the table, and the tenant-to-be has very few. Conventional thinking is that the buyer has the advantage, but when leasing commercial space, few tenants have the knowledge to be able to negotiate the best terms.

What You Don’t Know Can And Will Cost You

There are often many hidden items in a lease (and even some not so hidden) that cost tenants significant amounts of money over the term of the lease. Advance knowledge of these items obviously will prevent surprises down the road. These items can also become a part of the negotiation, since questioning or investigating these items can potentially reduce your overall lease expenses.

For example, most landlords will include clauses in the lease that allow for the pass through of the building’s operating expenses. In this case, a “base year” determines the landlord’s charges for operating expenses in year one of a lease, which the landlord absorbs. This base year is then used to compare operating costs in subsequent years during the lease term. It is it essential in leases, although not necessarily standard, that the base year be “grossed-up” to reflect a building that is at least 95% occupied. This issue is in the forefront today, given the significant vacancy in the market. Expenses such as utilities, water, supplies and janitorial will be less in a building with a 20% vacancy than a building with a 5% vacancy. If in a base year there was no “gross-up” for the costs of running the building, the tenant would see significant increases each month in comparison years on operating expenses when the building is 95% or 100% leased.

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There are always items that will not be negotiable, but due to the recession of the past few years, there has been a shift from a landlord’s market to a tenant’s market, and tenants now have much more negotiating power than in year’s past. Many of the hidden costs found in leases are remnants of contracts written during better economic times and just don’t have to be agreed upon in today’s market.

Tenant Beware

One of the best ways to save money during the lease process is to carefully analyze the conditions of the lease. “Tenant beware” is always a good strategy to follow, so start by asking questions about key items that may not be explained thoroughly in the lease. These are just a few examples:

  • Is the floor area computed using the standard method pursuant to The Building Owners and Managers Association guidelines? Furthermore, is the amount of square footage subject to change during the lease term? Believe it or not, leases often give landlords the right to increase the amount of square footage, thereby increasing the rent, if this is not addressed during lease negotiations.
  • Does the lease give you an option to renew the lease at market rates? An even more fundamental question is “What is market?” It’s wise to check in the body of the lease if “market” is simply limited to the rental rate without consideration to concessions of the market at a given time. In today’s tenant’s market, rental abatement and tenant improvements are certainly some of the standard “market” items that a wise tenant will address. Often the fine print of the option language will state the rental rate is at market. However, if current market is less than the last month’s rent, the new rent will be the higher of the two numbers. Essentially the tenant would be penalized for being an existing tenant unless the option clause is carefully drafted to protect him.

It Pays To Plan Ahead

It is easy to overlook significant issues when negotiating a new rental rate. Tenants, for ideal positioning, should start the process 18 to 24 months before a lease expires or notification of an option. The most pressing reason for tenants to address a lease expiration in a timely manner is the “holdover” provision often found at the end of a lease document. This provision outlines the cost for a tenant remaining in the premises beyond lease expiration, even if he remains in the premises with the landlord’s consent. This holdover cost could run as high as 300% of the last month’s rent, another unforeseen expenditure if the tenant does not protect himself.

A tenant may have negotiated aggressively for the high-identity location directly off the elevator lobby. Can the landlord relocate him? Yes. Leases often provide a landlord the right to relocate a tenant at the landlord’s discretion—again an unforeseeable cost, which may be limited or avoided with careful attention to this clause.

Keep in mind that a very small amount on the price-per-square-foot can add up to a large sum over the life of a multi-year lease. A mere $.25-cent increase in rental rate for 5,000 square feet hits the bottom line with a $75,000.00 increase of occupancy cost over a five-year lease.

Leasing shouldn’t be complicated, but it can get that way very quickly. Your best strategy is to assemble a trusted team of professionals to help you understand your options and obligations, and to make sure your interests are being looked after. •

Three Cost-Saving Strategies

Here are three proven strategies that can help you lower your cost and make the leasing experience a better one.

1

Have Good Tenant Representation—It’s Free! Most business owners don’t realize that signing with a qualified tenant advisor or representative costs you nothing. Much like the sale of residential real estate, a commission is typically structured into the landlord’s rate structure, which pays the tenant representative when a deal is made. This means that not only do you not have to go to the negotiating table alone, you can go with an expert! Good tenant representatives will know the area, the buildings, the landlords, the management companies, the current market status, the lease contract provisions, and much more. Simply put, you would never go to court allowing the opposing council to represent your interests. Why would you go to the lease negotiating table without your own tenant advocate!

2

Question Everything. Leave nothing to chance. Ask your tenant rep about the area, the building you are interested in, the landlord’s history, and the current market rates. As you get close to a deal, review the lease contract with your tenant advocate and get clarification on any points you don’t understand. They will also talk to the landlord on your behalf and get explanations for anything you don’t understand. (Be sure to have an attorney review any contract before signing.)

3

Think Long Term. Whether you plan on signing a three-year lease or a 10-year lease, consider your options when that time expires. Do you have a renewal clause? At what rate? Can you add space? Are you able to sublet or assign the lease? Also, when reviewing the lease, think in terms of total costs—everything bundled in. This will help you assess true cost and value to make better long term decisions.—S.M.

 
Case In PointCASE IN POINT:
Negotiating Before A Lease Is Finished

A client came to us with two years left on his lease. He was interested in staying in the building, but was seeking more favorable terms.

We approached the landlord and learned he was anxious not to have the space go vacant in this soft economy. With that in mind, we created a plan that included renegotiating the remainder of the current lease in addition to a new term of lease. Though this is not always possible, in this case we knew the local market and the landlord and believed we could strike a deal.

We were able to restructure the lease (reducing the current “over market” rental rate) in exchange for signing a long-term lease. At the same time we achieved all the concessions in the market as though our client was a new tenant to the building. Our client realized a $140,000 cost savings over the existing lease obligation, and the landlord was able to keep the space filled for years to come.—S.M.

 
Commercial Leasing Lingo

Abatement: Often referred to as free rent or early occupancy.

Above Building Standard: Upgraded finishes and specialized designs necessary to accommodate a tenant’s requirements.

As-Is Condition: The tenant accepts the existing condition of the property at the time the lease is consummated.

Base Year: Actual operating expenses for a specified base year, usually the year in which the lease commences.

Building Classifications: Building classifications are generally Class A, B, C and sometimes D. Class A properties are usually newer buildings with better construction and finish in very good condition and may offer amenities such as on-site management or covered parking. As the Class of the building decreases, factors such as age, location or construction of the building become less desirable.

Building Standard: Construction materials and finishes that represent a landlord’s minimum quality standards with respect to tenant finish.

Build-Out: Space improvements done per the tenant’s specifications. This takes into consideration the amount of Tenant Finish Allowance provided for in the lease agreement.

Build-To-Suit: An approach taken to lease space by a property owner in which a new building is designed and constructed per the tenant’s specifications.

Comparables: The lease rates and terms of properties similar in size, construction quality, age, use, and typically located within the same sub-market that are used as comparison properties to determine the fair market lease rate for another property with similar characteristics.

Concessions: Cash or cash equivalents expended by the landlord in the form of rental abatement, additional tenant finish allowance, moving expenses, cabling expenses or other monies expended to influence or persuade the tenant to sign a lease.

Escalation Clause: A clause in a lease which provides for a rent increase to reflect changes in expenses paid by the landlord, such as real estate taxes, operating costs, etc.

Face Rental Rate: The asking price or rental rate as determined by the landlord.

Full Service Gross: An all-inclusive rental rate that includes operating expenses and real estate taxes for the first year.

Low Rise: A building with fewer than four stories above ground level.

Market Rent: The rental income that a property would command on the open market with a landlord and a tenant ready and willing to lease.

Pass Throughs: A tenant’s pro rata share of operating expenses paid in addition to the base rent.

Prime Tenant: The major tenant in a building serving to attract other, smaller tenants into adjacent space because of the customer traffic generated.

Renewal Option: A clause giving a tenant the right to extend the term of a lease, usually for a stated period of time and at a rent amount provided for in the option language.

Space Plan: A graphic representation of a tenant’s space requirements, including wall and door locations, room sizes, and sometimes furniture layouts.

Step-Up Lease: A lease specifying set increases in rent at set intervals during the term of the lease.

Tenant Improvement: The amount of money contributed by the landlord toward tenant improvements. The tenant typically pays any of the costs above and beyond this amount.

Triple Net (NNN) Rent: A lease in which the tenant pays certain costs associated with a leased property, which may include property taxes, insurance premiums, repairs, utilities and maintenance.—S.M.


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About the Author

Sheryl Mazirow
Sheryl Mazirow
Sheryl Mazirow, CCIM, is President and founder of Mazirow Commercial, Inc and brings 30 years of expertise in Tenant Representations Services to the table. Ms. Mazirow has been recognized as a “Women of Influence in Commercial Real Estate in Southern California by Real Estate Southern California Magazine, as well as awarded the San Fernando Valley Business Journal Executive of the Year award, and Woman of the Decade award. She also holds the coveted Certified Commercial Investment Member designation from the CCIM Institute, which less than 1% of the world commercial real estate professional achieve. Ms. Mazirow spent 20 years at a national real estate firm gaining invaluable experience. She can be reached at Mazirow Commercial, (805) 449-1945. Read more about Sheryl Mazirow...




 
 

 
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