Today’s office space landscape is far different than it was a few years ago, and the driver in the Los Angeles area is the desire of tenants to secure what is known as creative office space. Although traditionally sought by technology firms, this trend has gone mainstream with law firms, real estate companies, accounting organizations and insurance companies now demanding corporate office space that is 180-degrees opposite of “our father’s office space.”

New Must-Haves Come At A Price

Today’s creative office environment often includes an “open ceiling” exposed plenum, which is the area between the structural floor and the dropped ceiling that houses air conditioning, heating ducts, and insulation. Some may consider this “unfinished” look to be cost effective to accomplish. But in actuality, it can be rather expensive to change traditional space into an exposed environment to create the desired look.

Mazirow Commercial’s president Sheryl Mazirow states that creative office space includes “neighborhoods” where offsite or remote employees and visitors to the office can plugin and log-on in order to perform their tasks on an as-needed basis. Permanent office space is no longer necessary for these types of employees.

Clusters of open spaces are the hallmark of creative office space versus a row of offices along the window line with secretarial or staff bays on the interior in traditional corporate office space. This open landscape is designed to promote interaction and collaboration among employees or departments, known as “neighborhoods,” within an organization. There often is no specific office assigned to a particular individual. Employees “plugin” and “log on” and perform their work task at different areas within the premises. Private conversations take place in a “huddle” area, which is often simply an alcove. Offsite employees who drop into the office and all visitors in the office are said to be “hoteling.”

Creative office space has a lack of walls to create enclosed spaces. This all seems like an easy, efficient way to provide workspace. Unfortunately, it isn’t. Tenant improvement costs are incurred due to opening up the ceiling to expose the plenum areas and as well as for demolition of the previously designed traditional offices. Core drilling into concrete floors for electrical and data drops can get expensive but is critical in these open landscape plans. Often “soft walls” made of fabric, which can be decorative to enhance the atmosphere, may or may not be movable and used within the premises to define a specific area.

Generally, creative office space in Los Angeles translates into to a boatload of employees. Therefore, density has become a major topic of discussion during the lease negotiations, and the load usage of electricity is a hot button issue due to the number and variety of gadgets that employees use daily in this type of office environment.

Parking, Kitchens, Dogs And Bikes

The allowance for dogs and bicycles in the workplace are a new norm for creative space leasees. A non-traditional open landscape promotes interaction and collaboration among employees. And natural light is being demanded more and more, according to Sheryl Mazirow, President and founder of Mazirow Commercial, Inc.

Parking also is another important issue that must be addressed in lease negotiations. Often, the standard of three parking spaces for each one thousand square feet leased, known as the 3/1,000 Rule, is not adequate and was undoubtedly established when the building was constructed. Landlords can later go back to the city and request a modification, but this often is difficult to achieve. There are other options such as re-striping the parking lot to include more spaces, providing a valet service to jockey cars into other space around the building, or converting reserved parking spaces—especially those that are vacant the majority of time—into unreserved ones to accommodate daily employee and visitor demand.

Kitchens no longer satisfy the strict need for food in creative office space, and they have replaced conference rooms as significant topics of negotiation. The “look” and “brand” that the organization wishes to display to the world is now imprinted in the kitchen area. Often the kitchen will be the central point within the premises, no longer regulated to an interior windowless space, but the premier lounge location. Kitchens have become gathering areas to work, create, and collaborate.

Under the Rules and Regulations section of a lease, a tenant will normally see the prohibition of dogs, but the creative office user is big on dogs. This can be a difficult but humorous negotiation. We just completed a lease that hinged on how many dogs are allowed into the building, how many times a week one dog can enter the office, and how much it can weigh.

Additionally, there is usually a prohibition on bicycles in the workplace or worksite. However, this is a common mode of the transportation for the creative office user. Institutional ownership of buildings is being challenged to achieve a comfort level of permitting dogs versus bicycles, where the landlord provides racks and bikers the locks. But we’re seeing new buildings stepping up to the challenge by providing restrooms with lockers and showers in addition to bike storage options.

Natural Light

The window line also is critical issue because users want to be as close as possible to the outside environment and natural light. Users also want easy access to parking and amenities; restaurants within walking distance are a must.

Multi-story buildings from in the 1970s are very challenged to accommodate creative office space given the architectural design that was popular then and their location in “concrete jungles,” but we are seeing large, ­single-story industrial buildings redesigned for creative office space. Additional parking and exterior green areas for gathering are being incorporated into these projects, but they come at significantly higher rental rates.

Evolution

The world of office space continues to evolve. It would have been hard to imagine a few years ago that a transaction would come down to how many dogs may visit your office per week and how much they are permitted to weigh. Even negotiating where bicycles can be safely stored would have drawn strange looks. While it sounds like this “could only happen in Los Angeles,” the trend of creative office space has spread to San Francisco, Seattle, Houston, Chicago, New York City, and Miami. Get ready for a new and fascinating era of working in an office. •

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But how do you know what to do? It’s easy—just read How To Save On Your Next Office Lease by Mazirow Commercial founder and president Sheryl Mazirow. It’s a great feature article loaded with great information on what to look for, how to save money, and ways to negotiate better terms.

One of the key takeaways offered by Sheryl is that one needs to recognize that landlords lease space all the time. Tenants only lease space every few years at best. By engaging a good leasing professional, you won’t have to go to the negotiating table alone. And what’s more, their services to you are typically free (they’re paid by the landlord out of the lease).

So if you don’t want to get taken for a ride on your next office lease, don’t go to the table alone. Read How To Save On Your Next Office Lease. Special thanks to Sheryl for contributing this great piece. (For more information on Mazirow Commercial, click here to visit www.tenantadvisory.com.)

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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.

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:

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. •

CASE 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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