How to Negotiate A Commercial Office Space Lease
Prior to negotiating any lease, make sure the space fits your needs. You don't want to find out after moving in that the space does not meet your needs. Make a checklist of your needs & talk with other tenants to make sure the building is well managed. Once you are confident a space will fit your needs & you are ready to negotiate, it is helpful to understand that landlords come in all shapes & sizes. The spectrum ranges from buildings owned by a person you can sit down and talk with to buildings owned by real estate investment trusts that have hundreds of buildings in their portfolio. Regardless of who owns the building, the steps to negotiating a great deal are the same. For these 5 steps to work you must be able to accurately define your office space needs.
- Give yourself plenty of time.
Get as much of a head start on finding and negotiating a deal on office space as possible. Depending on your needs the time it takes to find the right space can vary widely. The commercial office space industry moves slowly compared to other industries. In addition, office space inventory is constantly changing as leases end, new leases begin, buildings are sold to new owners & new buildings are built. For example, OfficeSpaceAtlanta.com recently helped a non-profit organization in Downtown Atlanta find space & it took almost a year to find the right space. As it turned out, the space they took was at another building nearby that had recently been purchased & the landlord was motivated to fill it up. We had looked at the same building roughly a year earlier and the previous owner of the building was not interested in the non-profits business at that time.
- Here's the deal: Shop to find the motivated landlords.
Julie Gudger, a qualified tenant rep with OfficeSpaceAtlanta.com knows building landlords are more motivated to lease space at various times for assorted reasons. For instance, some buildings are very motivated to lease space when they are trying to sell the building. Since they won’t be managing the client base long term their standards relax & they can be more motivated to make a deal. At other times buildings with new ownership are motivated to make a deal. Some buildings may be more motivated to lease space if they have a large tenant moving out. Unless you want to pay market price and give the building landlord whatever they require you will need to find a motivated landlord that wants your business. After finding buildings that fit your needs don’t assume a building is going to work with you until a lease is signed. Having a great initial meeting with the leasing agent means very little. There are numerous factors that can cause a deal to fall through. If you are already in a lease & want to stay where you are at, shop the market anyway. You never want the landlord to believe that they are the only game in town.
Why does this Matter?
As an example, Julie Gudger with OfficeSpaceAtlanta.com helped Peachtree Offices in Atlanta renew a lease for over 20,000sq.ft. of space & the landlord provided over $500,000.00 in TI allowance to Peachtree Offices to renew for another 10 years thanks to the introduction of competition into the negotiation process.
- Require & Have Realistic Expectations.
Many landlords are not motivated to keep a grasp on reality. These buildings are looking for the perfect tenant that will allow them to make as much money as possible with the lowest risk possible. These building are perfectly happy to have vacancies for months or even years while they wait for the perfect tenant. Keep shopping for space until you find a space that meets your needs and allows you to get a great deal. Keep in mind you are leasing space, don’t treat it the same way you would if you were buying space. In contrast, the barrier to entry to own, maintain & manage a commercial office space building is very high. You can’t blame the landlord for having a high standard for leasing the space. It is important to understand the deal the landlord will make on 50,000sq.ft. of space on a 10 year lease to a Fortune 50 company is much different than the deal they are willing to make to a startup looking for 1000sq.ft. spec suite on a 3 year lease. To find a landlord with a grasp on reality the tenant must also have a grasp on reality. If a realistic landlord sees that the potential tenant is asking for unrealistic things it will likely sour the deal.
- What's the real story? Leasing agents master negotiating.
The leasing agent for the building is hired by the landlord to protect their interests. Julie Gudger, a tenant rep from OfficeSpaceAtlanta.com negotiates on your behalf to protect your interests. For a tenant or tenant rep to effectively negotiate with the leasing agent they must know what to ask for. What is appropriate for the tenant to ask for varies depending on the length of the lease term, the class of the building (A, B or C), the tenant’s financials & the tenant improvement (TI) allowance the tenant requires.
Look: The main items to pay close attention to in the lease negotiations are:
- Rent amount – A competitive analysis of similar spaces on the market from CoStar is the best method to ensure you are getting a competitive rate. Make sure you are comparing apples to apples. For instance, you can't compare a full service lease to a tripple net lease. Checkout our office space leasing FAQ's for more detail on lease types.
- Free Rent – You need to know how much free rent to ask for. The standard is one month abated/free rent for each year of the lease. For instance, a 10-year lease would have 10 months of abated rent. When the free rent is applied is dependent on many factors. For instance, the amount of the security deposit the tenant provided and the tenants financials.
- Security Deposit – You want to make sure that the security deposit is returned to you over time or at the end of the lease.
- Tenant Improvement (TI) Allowance – You want to make sure that the allowance you negotiate will cover the actual costs to get the space completed to your design. Commercial construction is expensive. Ask the building to send out quotes to contractors prior to signing the lease. Don’t assume anything when it comes to commercial constructions costs. Also, negotiate that any of the unspent TI allowance be available to you for additional enhancements to the space. Also, make sure the building is bidding the work to a minimum of three contractors.
- Timelines – If the lease includes a TI allowance and construction to the space the lease will include a work letter with multiple time sensitive dates that involve design, permitting, construction and more depending on your specific lease. Review all timelines required in the lease and negotiate any you are not comfortable with.
- Project Management - If the lease includes a TI allowance that requires construction, the building will usually have their own preferred project manager. The building will usually charge a 3% fee to facilitate managing the project. Negotiate for the ability to hire your own project manager if needed as an option. If this option is utilized, make sure the fee paid to the building is reduced to 1%. If the building uses a good project manager, the 3% fee is worth it. However, you don't want to be stuck paying the 3% fee to the building if their project manager is lousy.
- Commencement Date of the Lease - If the space requires any construction, there are factors that can delay construction on the space. Negotiate to have the commencement date of the lease adjust for any delays outside of your control such as construction delays.
- Lease document inspection is critical.
Have an attorney qualified in commercial office space leasing review the lease prior to signing. A good attorney checks for things like making sure the landlord can't pass along non-standard increases, checks for end of contract pitfalls like pre-existing condition clauses, checks for sublease stipulations and many other items. Many commercial leases pass through to tenants a pro-rata share of the landlord's expenses and taxes. Unfortunately, some landlords attempt to pass-through items the tenant should not be expected to pay. A good commercial real estate attorney will check to see if the lease requires CAM (Common Area Maintenance) fees to be paid. Many landlords calculate CAM differently. By definition, CAM should only be for maintenance costs on common areas used by the tenants. Some landlords will try to include salaries, administrative fees, advertising, legal services, accounting services, roofs, exterior repairs and just about anything else they think they might be able to can get away with. The attorney should request that the landlord show specific examples of how they calculate CAM. For instance, what if a large tenant in the building negotiated CAM fees out of their lease? By checking the math, the attorney would catch the landlord trying to pass those CAM fees unfairly to you. The attorney should also request the lease specifically state the landlord is obligated to provide proof for any future CAM fees & taxes. The attorney should request language be added to the agreement to make sure that the CAM fee has a cap. For instance, language that would not allow the CAM to increase more than 5% from year to year. Regarding the pro-rata share of taxes, you should not be expected to pay unless the tax is specifically for the building. Again, the attorney should request that the lease state that the landlord is obligated to prove any fees or taxes upon request. Lastly, the attorney should closely review any reference to the base year in the lease or future amendments as those can have a big impact on your obligations to the landlord. The attorney may not find anything the building will budge on. Alternatively, the attorney may find items in the lease that the building is willing to revise. Regardless, a good attorney will catch anything that should be carefully considered by the tenant. A good attorney also understands they have to have realistic expectations or they can kill a deal. At the end of the day the tenant needs to be aware of all requirements of the lease & a qualified attorney can highlight those items for additional consideration.
OfficeSpaceAtlanta.com can help you negotiate a great deal on office space. Contact us today or fill out the find your office now form to get started.