A tenant rents office space only a few times in their corporate life, while landlords rent space over and over again. Keep an eye on these 9 issues that are frequently overlooked and you are more likely to end up with a happy ending.
The author, James Osgood, is the founder and President of OfficeFinder and has been in the office leasing business since 1979.
Carefully Review Your Operating IssuesThink about the mechanics of how your business operates as you are reading through the lease. Watch out for issues like (a) after hours HVAC service — is it available and how much will it cost?; (b) do you make higher than normal levels of noise at particular times?; and, (c) your employees/Tenants love to cook popcorn in the micro-wave in the afternoon and that is strictly forbidden by the lease.
Don’t Neglect the WorkletterThere are 3 main components to a lease agreement. The business points, the legal points and the workletter. The final negotiation item is the Workletter. In many cases, the landlord will give the tenant an improvement allowance in a dollar amount, which typically forces the tenant to deal with a Workletter. Not only does it state what each party is to pay, but also what happens if the cost of the improvements exceed the allowed amount provided by the landlord. The (TI) allowance can be applied to either useable square feet of the premise or rentable square feet. The rentable square feet is always larger, usually 10% to 15% more, unless it is a single tenant building, so the dollar amount would be more. Make sure you understand to which measurement the allowance is being applied.
The Sublease Space OptionYou’ve heard that you can get a really good deal on sublease space. It is true, but as with almost every benefit, there are increased risks. Financial condition of the sublessor should be investigated thoroughly. If they don’t pay the rent, you suffer. If the sublessor files bankruptcy, your sublease is at risk. You are stuck with whatever terms and conditions negotiated by the sublessor with the landlord. There is usually no tenant improvement allowance to make changes. You will have to live with what you get or dig into your own pocket. What can you do to protect yourself? Ask for some form of security from the sublessor. A letter of credit, for example, that will provide funds for increased rents or moving costs if the tenant goes out of business. Once you've negotiated a sublease deal, take it to the landlord and try to convert it to a direct lease. In any cse make sure the Landlord signs the sublease.
Don’t let your enthusiasm to make a deal make you a bad negotiator.It is easy to get wrapped up in a negotiation and try to do anything to make the deal. If a negotiation fails to yield what you want, don’t look at it as failure, but as part of the process of getting what you want. Move on to the next best alternative. Here si a link to info on the office leasing process.
Separate the Business points from the Legal PointsClearly understand and have agreement on the business points of the transaction before delving into the legal points. It will keep the negotiations clean and clearly differentiate the stages of negotiations.
Cost-pass-throughs cautionsIf you are moving into a new or partially occupied building add some protection to the Cost-pass-through provision that will require the landlord to calculate your annual cost-pass-through based upon a 90% or 95% occupied building. This will protect you from moving into a building that takes a long time to lease up. The operating costs for a partially occupied building are significantly less that for a full one. Whether your lease calls for an operating expense cost-pass-through or expense stop, make sure you know your starting point. Be aware of what calculation method is normal in your market. Depending on the market, your cost pass through base year should be either the current year or first year of the lease. It can be either calendar or fiscal. If your lease calls for an expense stop in which you pay for any expenses above a certain amount, get the historical information to allow you to make sure your expense stop is current so you don’t get stuck with unexpected costs.
The Most Forgotten Part of the Lease: Rules and RegulationsThe smart tenant, the good broker, and the efficient attorney will always read the entire Lease. Not because it’s fun reading, but rather to understand the potential ramifications that could be set in motion should some unfavorable clause actually come into play. While everyone always reads the summary page and most read the next ten to fifteen sections, only a few get through the dry sections – sixteen to infinity. Very few really read the Rules and Regulations. After all, it’s mostly non-issues like “Tenant may not have sales” or “Tenant can't have pets.” Be careful, some of these hidden issues may actually impact you as a tenant. Read the Rules and Regulations as carefully as you do the rest of the Lease. Can you cook in your suite? Most say you can't. Seems microwaves weren't invented when most leases were first drafted. What are the building hours? If it says 8 AM to 6 PM, what happens if you want to come in early or stay late?
Tenant Improvement allowance is often applied to square feetThe (TI) allowance can be applied to either useable square feet of the premise or rentable square feet. The rentable square feet is always larger, usually 10% to 15% more, unless it is a single tenant building, so the dollar amount would be more. Make sure you understand to which measurement the allowance is being applied. The attached link shows the generally accepted method for measuring office space.
- Get Professional Help... Finally, as mentioned in the beginning, as a tenant you rent office space only a few times in your corporate life, compared to landlords who rent space over and over again. Our final tip is to level the playing field by taking advantage of the availability of a good tenant representative on both relocations, renewals or subleases. They represent you and their services to you are almost always paid by the landlord. Doing so will save you both money and frustration over the long run, not to mention help you avoid making costly mistakes.