By Stephen F. Graw
When you negotiate your office lease, keep in mind that your office landlord is a real estate professional—he or she, like all of us, is in business to make money.
To save thousands over the duration of your lease, it’s important you, the business owner, understand your lease’s legalese, options for upgrades and market’s commercial real estate norms.
An experienced commercial real estate broker will guide you through and manage the process for you, but it’s always good to have a deeper understanding—especially when money, time and your business is at stake.
To get informed and prepared, here’s short office lease negotiation checklist:
1. Dig up your own market data. Unlike property deeds, commercial real estate leases are not public documents. But, you can find your own data by:
- Touring properties for lease in your desired area and taking notes of asking rental rates, lease types, tenant improvement packages and operating expenses.
- Calling other business owners who are leasing space in the area you are considering and ask if they’ll share their lease terms.
2. Request proposals. Select at least three properties to move forward to the negotiation phase and ask for proposals that clearly delineate rates and terms. So you are equipped to make apples-to-apples comparisons during lease negotiations, make sure all proposals contain the following information:
- Rental Rate — Most commercial real estate lease proposals are quoted by an annualized square-foot rate. For example, $20 a square foot X 4,000 square feet = $80,000 a year.
- Load Factor — Most office buildings have a load factor, also known as loss factor. This percentage added onto the actual useable square footage that your company will occupy is typically used to pay for atriums, hallways, common restrooms, etc.
- Tenant Improvement (TI) Packages — TI packages are construction allowances for your office build-out. Realize that there is no free lunch: the better the TI package, the less likely you’ll be able to negotiate a lower rent or more favorable lease terms.
- Operating Expenses — If you’re negotiating a full-service lease, it’s common for the first year’s operating expenses to be included in the first year’s rental rate. However, in many leases, for the remainder of the lease term, your company may be required to pay the operating expenses that exceed the actual operating expenses of the first 12 months of your lease term. Take note of buildings that operate at a higher rate than others— this may be a sign of a poorly managed property.
3. Analyze the proposals. Create an Excel spreadsheet to compare the business terms of each proposal side-by-side. Be sure to take note of the lease type:
- Full Service — Base rent, common area maintenance, real estate taxes, insurance, utilities and janitorial services are all included in your lease cost.
- Modified Gross — Base rent, taxes and insurance are covered in your lease. You’ll pay the remaining costs separately.
- Triple Net — Every cost is paid separately.
4. Draft lease. I am an advocate of an extremely detailed proposal process, as proposals are non-binding and enable you to freely discuss the lease terms without obligation, which makes the actual lease much quicker to move through. After selecting your final property and negotiating all of the deal points, ask the Landlord for a draft lease. This is now a legally binding contract and you should probably seek legal counsel for review and negotiation of this document.
For starters, make sure that all the proposal terms were accurately inserted into the lease document. Then, take a through look through the additional pages and ask a few questions.
- How are capital items for the building accounted for?
- How is indemnity liability worded?
- Can the landlord relocate you if a larger company comes along offering better terms?
- What is the holdover rate, that is, the rate you will pay if you continue to occupy the space after your lease expires?
- What happens if there are damages to the space?
Whether you are signing your first lease or your 100th, thorough preparation for the negotiation process is critical. The more know you know, the more you will be able to negotiate like a pro—or make sure your commercial real estate broker is.
With that in mind, your time is best spent doing what you do best, operating your thriving business. Leave your commercial real estate needs to an experienced commercial real estate broker who can negotiate aggressively on your behalf.
Stephen F. Graw is a Nashville-based commercial real estate broker with Sperry Van Ness Nashville. He has nearly 10 years experience and currently focuses primarily on office tenant and investor representation.