I soon will be posting a variety of content on small tips and tricks to help tenants in regards to their existing lease and/or new office lease.
Renewal:
- Base year issues – at the very least you will want to reset you base for tax escalations and operating escalations
- renewal option – to exercise or not?
- In today’s market you TREMENDOUS leverage to better your rate
- refurbishment?
- Does the space configuration still work?
New Space: (where to start!)
- Location
- Price
- Amenities
- Hire agood broker (link)
- Fenestration
1. Develop Realistic Alternatives to Create a Competitive Environment
2. Start the Process Early
3. Knowledge is Power
Is the office building being sold?
Is the largest tenant moving out?
How much free rent did the last tenant get?
Does the building have HVAC or parking problems?
What is the landlord’s financial situation?Your tenant representation broker should also analyze the market to provide a true “apples to apples” comparison of different facility choices. Lease terms such as full service gross, modified gross, triple net, tenant improvement allowances, rental abatement, escalations, base years, operating expense stops and loss and load factors can obscure the true amount you’re paying and make legitimate comparisons difficult. A good tenant representative will sort through all this for you. (Thank You James Bremer)
The 11 Biggest Mistakes Made When Leasing Office Space
Our Tenant Representation Team often finds companies making the same mistakes while going through the office leasing process. In the subsequent pages you can read about the detailed challenges and mistakes companies in California face when in the leasing process.
Mistake 1- Skipping the most important step of all: Identifying the Company’s Current and Long Term Goals & Priorities
Skipping this step is a disaster for companies. By failing to align long-term and short-term goals and priorities with regards to the space allocations of your company is one of the largest mistakes companies make. Make sure to sit down and take the time to identify the following factors. It will pay off in the long run. Write out what is going to be important to you and your company when it comes to your office space. The below categories can act as your checklist when determining what is important for your office space:
Corporate Identity
What image or identity is important to convey to customers, prospects, and employees?
Layout of Space
What type of environment does my business need in the office?
• An open environment that creates collaboration amongst my employees
• A more traditional environment where certain employees have their own private offices
• Separate spaces for divisions
• Which departments would be best next to one another?
Budget
What can the company afford? Does the budget match up with the corporate image?
Growth
What’s the future growth of the company? Will this office space put constraints on expansion or contraction? Does this office complex give me additional options to grow my business with limited interruptions?
Technology
Is there a certain technology that my business needs that is only available in certain locations? (e.g. Data Center, Electrical Capacity of a building, or Backup Power)
Competition
Where is my competition located? Is there a reason they are located there? Can I be in the same building or office complex as my competition? Should I be near them?
Hopefully, this list will serve as a guideline to get you and your team started on determining the current and long term priorities regarding your office space.
Mistake 2 – Not using a Broker or Using the Wrong Broker
Some companies insist on looking for office space and negotiating their office space renewals on their own. Often this is because the decision maker thinks they will save money by not having a broker’s commission factored into the deal. This reasoning is valid due to the 4% savings a landlord will not have to pay for the Tenant Representation’s Broker’s commission, but a good broker will generally produce on average a 10% – 15% improvement on the deal terms and therefore pay for themselves in spades. Also, a C level person’s time is worth more than 4% savings. Lastly, a company usually only deals with their lease every 3 – 5 years, while a broker deals with it every day. Who is more qualified to get to the best bottom line?
Choosing the Wrong office broker is also a costly error that happens on a regular basis. Not choosing the right broker can be a costly mistake for several reasons. First, an office space search or office renewal can take anywhere between 60 days to 2 years (depending on several different variables) which is a significant amount of time to be dealing with someone. Make sure that you and your broker get along! It can be a misery if you don’t! Second, a company’s office lease is usually a company’s 3rd largest expense and the right broker will be able to reduce a big expense and effects your company’s bottom-line. The right broker should be able to protect your company’s interest on non-economic terms as well. Lastly, make sure your broker knows the submarket that you are most interested in. A good broker should be able to predict the final rental rate of your office space by at least $1.00/Rentable Square Foot. Ask the question to potential brokers you are looking to hire and gauge the quality of a broker by their response.
Mistake 3 – Not Allocating Enough Time for the Process
Over and over again we run into clients who have not allocated enough time to fully go through the lease process. They haven’t given themselves enough time to explore the office market to find comparable alternatives and then use those alternatives as leverage against their current landlord. If you first to come to your existing landlord with 3 months left on your lease, that landlord knows that you don’t have enough time to move out of your space before you go into the holdover period. Thus, you lose your leverage to obtain the best deal for your company.
Mistake 4 – Making a Decision Based Solely on “Price”
Making a decision based solely on “price” is a mistake that more and more companies are making due to the current economic climate. Understanding the other factors that should go into the decision making process will pay off in the years to come. Below is a list of factors that should be addressed when choosing office space for your company.
Location, Location, Location:
Not just a real estate adage, but a fact of life. The location of the office is usually described as the either the biggest benefit or the biggest drawback.
Commute Patterns:
Take a preliminary survey of the employee’s current commutes and determine how the new office location might affect their commute pattern.
Amenities:
What restaurants, coffee shops, dry cleaners, and car washes are available nearby? Being in an isolated office park can be bad for the comfort of employees. At times in cannot be helped, but being in close proximity to the amenities employees use during their lunch break can be a huge recruiting advantage.
Safety:
What is the neighborhood like late in the evening? Have there been burglaries in the neighborhood recently? Would a female employee feel comfortable walking to her car or public transportation after working late on a project? All of these issues should be considered when considering your next location.
Layout of the Space:
Is the layout of the space desirable? Is there good separation between the lobby and the work space? Is there separation between the kitchen and the work space so food smells don’t permeate the office? Is there good natural light?
Image of the Building:
The question depends relates directly to the Company’s Identity and how you would like to present yourself to clients and potential employees. If you are a law firm that litigates class-action lawsuits it might not make sense to have the top floor of the nicest building in town. If you are a high powered corporate firm it might be absolutely necessary to display that image. The location, layout, and feel of your building and space will leave an impression on your visitors and should be considered in your decision making process.
Parking/Public Transportation:
Proximity to public transportation and affordable and convenient parking are extremely important. Many of your key employees might need quick access to transportation as they visit clients while others need convenient and affordable ways to get to the office. The more transportation options the better.
Recruiting:
Will your location and building aid or hamper you in your recruiting efforts for top talent? How will the location affect current employees?
Expansion:
Will your location allow for easy expansion? Is there space available nearby that can work if there is not space within your building?
Building Ownership & Maintenance:
Is the ownership local? Is the HVAC system consistently broken? Your landlord’s involvement and attitude and responsiveness towards tenant repairs should be a critical element of your building decision.
Mistake 5 – Not Understanding All of the Costs Associated with the Space
Not understanding all of the costs associated with each choice of office space is a common mistake companies make while determining their future location. This is because most tenants are solely focused on the rent and therefore neglect to identify additional expenses.
Below is a quick check list of the basic expenses an office tenant needs to understand prior to signing a lease:
Operating Expense Pass Throughs:
When signing a Full Service Gross (FSG) lease, find out what the base year is going to be on the lease. Then look through the building’s historical operating expenses and see how much the expenses have increased over the years. The increase in expenses above a tenant’s base year is going to be passed through to the tenant. This can be a significant expense that tenants often don’t realize until later in their lease term.
IT & Communications Expenses:
Find out how much it will cost to set up your internet, cable, VOIP, intranet, server room, etc. Whether you are expanding in your current location or moving into a new location, this is something that a tenant needs to determine before a decision is made. Talk to your IT team.
HVAC/Supplemental HVAC Costs:
Will you be operating after hours? If so, what is the building’s after hours HVAC charges? Will your data/server room need supplemental HVAC? If so, what is the cost? Will the Landlord pay for it? Ask the question before signing a lease.
Furniture
Will your current furniture work in the new space? Or will you need new furniture? If so, should it be new or used? How much is it to break down old furniture and move to the new location? You might be surprised by the answer, but either way you need to speak with a furniture vendor to understand the cost of both options.
Moving Costs
If you do move, what will it cost to relocate the business? Will your new landlord give you a moving allowance?
Insurance
Do you have an insurance policy that matches up with the lease requirements? If not, how much will it cost to adjust the policy? Have your insurance agent review the lease prior to signing.
These are some of the basic costs associated with your office space that some tenants overlook prior to signing a lease. There are others, but this is a good guideline to get you started.
Mistake 6 – Choosing the Wrong Office Space
Choosing the wrong office space is a mistake that is made more than a person would think! It happens for several different reasons. Here are several reasons why a company may end up choosing the wrong office space location:
• Nine times out of ten, the decision maker lives within close proximity to the office. Frequently the decision maker who made the final decision on the current office location is no longer with the company and the location is nowhere near the other employees.
• Traffic is worse than expected, and a person failed to realize this because the only times they toured the office space was during non-peak traffic hours.
• A person did not check into the tenant mix of the building and there are tenants within the building that make it an unpleasant experience.
• An office location is not centrally located for valuable employees and a company loses these employees to other jobs because of a better location.
• Traffic patterns change, making it difficult to get in and out of an office building. An example of this would be a freeway being renovated, or the number of traffic lanes being reduced due to streetscape being added.
Whatever the reasons for an office space location being the wrong one, there are several very easy ways to try and prevent this from happening. Below is a guide to make sure you choose the best office space for your company.
• Create an employee map – Have your broker plot out the addresses of all your employees, and find a central location
• Drive around prospective building choices during peak traffic hours
• Ask for a list of all the tenants within a prospective office building and review it
• Make sure your broker contacts all the necessary authorities to understand if any traffic “improvements” are going to be made near your prospective building choices
Mistake 7 – Miscalculating the Amount of Office Space Needed
Miscalculating the amount of office space needed by your company is one of the more frustrating mistakes a company can make when leasing office space. This mistake either wastes a company’s money on unused office space, or it can hinder a company from growing because there is no room to hire new employees. Erring in either direction can be a big problem if significant term is left on the lease.
One way to avoid this problem is to hire an architect to draw a space plan for your company when considering alternatives in the market. Let them know exactly how you’d like your office space to lay out, what your growth needs might be in the next 3 – 5 years, and which departments of your company need to be close together within the office space. By having a professional do this in the beginning, you’ll usually be able to avoid the pitfall of taking the wrong amount of square footage. Also, if you are worried about the cost, don’t be. Your new landlord will usually cover this cost as part of their Tenant Improvement Package prior to signing a lease.
The second way to properly calculate the amount of space the company will need is to allow for flexibility within the lease. As a tenant, you should make sure that you have favorable lease language that allows for you to get out of a lease if the landlord cannot accommodate your growth needs. If your company is downsizing, then you need to make sure that you have
favorable lease language that allows you to sublease your space with the least amount of interference from the landlord. Some growth or downsizing can be unforeseen, and preparing for it within your office lease will allow your company to avoid being stuck with too little or too much office space.
Mistake 8 – Signing Too Short or Too Long of a Lease
Signing Too Short of a Lease:
There are several reasons why a company may want to sign a short lease term. 1) They have not addressed future growth needs and don’t want to lock into a long term lease that limits growth. 2) In a down economy owners don’t want the liability of a long term lease in case the business does not make it through the economic downturn. 3) The company’s main goal is to be purchased by another company and a long term lease would limit those efforts.
While all of these reasons are very valid reasons to sign a short term lease, it might be a mistake because of the current market. Right now we are seeing one of the best office markets for tenants. Landlords are doing everything in their power to either keep an existing tenant or entice a new tenant to move into their building. If you sign a short term lease, you are playing right into the hands of the landlord. Sure, you’ll get a great deal, but when that lease ends in 2 – 3 years, the market will have recovered. By the time that company renews, the rental rate will be much higher than what the company was previously paying. Why not take advantage of the market? A company should lock into a great rental rate for 5 – 10 years while they can and allow for certain provisions in the lease to get out early if needed. Landlords are more willing to have termination clauses in their lease because of the down market.
Signing too Long of a Lease Term:
In profitable times companies often find themselves signing too long of a lease term. Why? Because they are simply thinking about getting a lease signed and moving on to their core business. Generally, most tenants don’t stop to think about growth needs and how to accommodate such needs. Also companies don’t often proactively protect themselves within the lease language in case they begin to struggle. During these times, landlords are able to push for longer (5 – 10 year) lease terms. These leases have very few, if any, termination clauses for a tenant to get out of a lease, and a tenant is usually paying the highest rental rates. During these times, if you can, sign a shorter lease term (3 years). The office market is cyclical, and it will be down again soon enough. When a company signs a long term lease in the height of the market, that company is often stuck in that lease and paying above market rent when the market turns.
Mistake 9 – Underestimating the Preexisting Condition of the Office Suite
Underestimating the preexisting condition of the premises or office suite is an easy mistake for a company to make when searching for office space. Most individuals, understandably, don’t know the cost associated with their office space build-out. Why would they? Companies usually only deal with their office space every 3 to 5 years, and move into new office space even less. Some individuals understand the basic principles of the interior build-out of office space. For example, they know it is less expensive to demo a wall than to build a wall. They know that if they can find an office suite with a similar layout to what they are looking for, then they can save money, etc.
Below is a list of items that are connected to your potential office space build-out:
Data & Cabling
Is the potential office space currently wired? If so, can it be reused? If it can’t be reused, who pays to have the wiring removed? If the space isn’t wired, how much will it cost to wire it?
Power
Is there enough power coming into the office space to run my business? If you are planning to put cubes into the office space, is there existing power available to plug the cubes in?
HVAC
Does the office space have a data/server room? If so, does it have a separate HVAC unit to cool the room? If not, does it need one? If the room does need a separate HVAC unit, who pays for it?
ADA Codes
Is the office space up-to-date on all of the ADA codes? If not, will it need to be updated? If so, who pays for it?
Make sure to monitor the above items and you’ll be able to avoid unforeseen costs associated with your new office space.
Mistake 10 – Not Asking for Enough Landlord Incentives
As we say in negotiating: If you haven’t asked for it, the answer is already “No.” Not Asking for Enough Landlord Incentives is a mistake that companies often make when they are not being represented by an office broker. This is because most tenants don’t negotiate lease terms on a regular basis and don’t know about all of the incentives that a potential new landlord is able to offer and does offer in order to entice a new tenant into their building keep a current tenant.
Furthermore, a landlord may offer incentives to tenants who are not using an office broker, but these incentives generally do not match what market incentives are for a comparable office building. To avoid this mistake a company should first hire an office broker. While this list is not exhaustive, below are a few common incentives landlords offer office tenants:
Free Rent
The amount will vary depending on the length of term, tenant improvement allowance, a tenant’s financial statements, and a host of other factors. The important thing is to be aware that free rent is out there.
Tenant Improvement Allowance
How much money a landlord will invest into an office suite depends on a host of different factors which are similar to the factors determining how much free rent a tenant can obtain. An important question to ask when evaluating a new office location is: Will the TI allowance cover the cost to make my new office suite just the way my company needs it to be?
Moving Allowance
Some, but not all, landlords will offer a moving allowance to help with the cost of a physical move. Remember, it generally cost a company $4.00 – $6.00/Square Foot to move an office. A company might be able to get a landlord to chip in on that expense.
Leftover Tenant Improvement Allowance
Again, some, but not all, landlords may allow you to use unused Tenant Improvement dollars towards other costs associated with your office space. Other landlords may grant you an allowance per square foot specifically for moving costs.
If you have chosen the right office broker they will know what the market norm is for the above incentives. There are many other incentives, but this will give you the basics to get started.
Mistake 11 – Not Having a Real Estate Specific Attorney Review Your Lease:
Many companies want to simply sign a lease and get back to work. A common mistake that is made is not having an attorney review the legally binding document that affects the company’s bottom line for years to come. More specifically, when hiring an attorney always have counsel that is real estate centric and has experience in your market with the most common owners as each has their own form and varying amounts of onerous language.
Credit to Scott W Johnstone
President
Scott@BridgeCommercialProperties.com
O: 949.783.4132 C: 949.300.1057 F: 949.783.4101 www.BridgeCommercialProperties.com
4 Advantages to Using a Tenant Representation Broker
1. More data, better analysis, faster results. A qualified tenant representation broker has access to a complete database of commercial space in your market. A business that outsources its real estate market research to a tenant rep broker enjoys a more comprehensive analysis while saving time for its employees.
2. Expert advice. A season tenant representation broker provides expert advice backed by market data and years of experience. This counsel levels the playing field during your negotiations with professional, full time landlords and their brokers.
3. Real cost savings. Your tenant representation broker reveals, analyzes, and documents all costs related to your lease, allowing you to execute a lease with peace of mind. Your broker creates a competitive environment between Landlords to achieve greater buying power for you. You pay no broker fees, your broker splits a fee with the leasing broker, paid by the landlord.
4. Peace of mind. Confidentiality is maintained so that employees do not become alarmed at a possible relocation. Your broker guides you through a leasing process that gives you the best office space, with the most tenant friendly lease agreement, at the best price possible.
via Chicago Commercial Real Estate Review: 4 Advantages to Using a Tenant Representation Broker.
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Did you reset your base year when you renewed?