Leases are unforgiving sorts of documents, once they are signed. Many a tenant has put pen to the signature line on a lease that ended up being bad for the business, in one way or another. Prudent business owners will study these common pitfalls of commercial real estate tenants, so that when they scrawl their John Hancock on a lease, they can be confident it is the best deal for their company.
Procrastination is the Enemy
You heard it often enough from your mom; now it is time to put her advice into practice. Don't put off searching for new office space until the last minute! Industry wisdom says that for space under 10,000 square feet, tenants should start searching a minimum of 6 months ahead of time. It could take at least that long to search for the right property, perform due diligence, and draft and negotiate the lease. If the space needs remodeling or construction to fit the needs of the business, it can stretch to 12 months or more.
For space needs over 10,000 square feet, businesses should look at least 9 months before their current lease expires. The larger the tenant, the more complicated the process, so big corporations will have to get started even earlier. Office space options could be paltry with a short searching window, and waiting too long could result in settling for the best that is available, rather than finding the best possible fit.
This advice goes for renewing an office lease as well--procrastination is the enemy. Approaching the landlord two months before the company's lease is up leaves the tenant no leverage to negotiate better terms, as the landlord will know there is no time to find anything else. Tenants should use market pressure to their advantage, looking into other options, familiarizing themselves with market trends, and allowing plenty of time to negotiate renewal terms.
Clarify Lease Objectives and Office Space Needs
Don't be so anxious to avoid procrastination that you rush out to look for space without taking the proper time to clarify your business's objectives. One of the most common mistakes commercial office tenants make is to not make properly specified goals, so that office space does not end up truly meeting the company's needs.
Company executives should develop consensus on objectives. What corporate image do they want to project, and what kind of office space will convey this image? Layout should be considered, and the preferred breakdown of collaborative office space vs. private office space delineated. Budget is a critical point, and if the company can't afford the image it wishes to project, it may want to rethink item one.
While on a roll with all of this planning ahead, companies should consider carefully the amount of space they need. This would be a good time to call in an architect to develop a space plan that considers layout, growth forecasts, and special details like floor load capacity needs. Many companies begin the process of searching without having carefully considered space needs, and end up stuck with expensive empty space, or low morale from crowded office conditions.
Growth should also be considered as company objectives are being laid down. How much additional space might be needed in the next 3 to 5 years? Or is there a possibility of downsizing? Special technology and electrical needs are also important. Is a data center needed? What about backup power? All of these items should be included on the objectives list so that goals and desired outcomes are crystal clear.
Put Together an A-Team
The landlord's core business is commercial real estate; yours is making widgets. It can therefore be assumed that the landlord has the edge on crafting leases that benefit his or her bottom line. Many companies make the mistake of not hiring a tenant broker, whose expertise and experience can be invaluable in finding the perfect property, and in negotiating a fair lease. Brokers can not only save the tenant time and money, but provide market data on demographics, trends, and the like that will help them select an optimal office location.
In addition to the tenant broker, companies would do well to enlist the help of an architect and an engineer to help define space needs, and a commercial real estate attorney to help tinker with lease clauses. Larger companies should assign a project manager to serve as a single point of contact for the business. This project manager should get feedback from the company's human resources, finance, and IT departments during the entire process.
Commercial Property Due Diligence
You just can't get away from homework, no matter how many years you've been out of school. Tenants who don't do their homework before signing the lease may find that the office space is inadequately wired, for example, and they are now stuck with the bill to rewire. Had it been determined ahead of time, rewiring the building could have been part of the negotiations.
Tenants should evaluate the building's mechanical infrastructure, especially when the buildings are older, to determine if it is adequate for business needs. The HVAC should be inspected, even if it is reported in good working order. Again, once the tenant takes possession, he or she incurs costs for repair.
Be sure safety codes are met, and check on ADA compliance. All of these elements are much better to address when the tenant has leverage to change them and no responsibility to pay for them.
Negotiate Your Office Leases!
Many tenants, especially smaller ones, are hesitant to negotiate lease terms. But smaller tenants greatly outnumber the larger ones; in New York City, 90% of all tenants are smaller companies. This should give businesses the courage to view everything as negotiable, and ask for what they want.
Landlord incentives should be explored, like tenant improvement allowances and moving allowances. Tenants should look at lease options to contract, expand, terminate, extend, and sublease space to prepare for growth or decline; and negotiate changes if they don't like what they see.
Costs should be carefully considered as well. Pass through expenses over the base year can be significant, and lease clauses should address caps and terms for these. Property tax and operating expenses can have caps as well, with a negotiated right to audit charges. Other inside operating costs, like running HVAC after hours, should be evaluated and terms negotiated if necessary. In short, no lease clause is too small to negotiate!
Don't let the Bottom Line be your Bottom Line
Don't get me wrong--budget is important, and companies should not enter into a lease that they simply can't afford. But one common mistake companies make is making price dominate their property search rather than looking at the big picture.
The value of the office space is more than its rate per rentable square foot. If the building reflects the corporate image, and will both impress clients and help recruit and retain employees, company owners should consider it over a cheaper space without these qualities. A space with abundant natural light might be much better for worker productivity, due to the marvelous effect of sunlight on the human mood. Companies would do well to value it higher than a less expensive space without the light exposure.
Location is paramount--it can be the property's biggest plus or biggest minus. Tenants should talk with personnel to establish commute patterns, and be sure that the location of the new property maintains or improves tenant commutes. Amenities should be considered as well, since happy employees are productive employees--is there a Peet's Coffee on the corner? Are there quality restaurants nearby? Is there a pleasant atrium that adds value to employees' workplace experience? All of these, plus safety of the location should be appraised; after all, you are paying for much more than just a few thousand square feet of space.
Tenants will not get what they need without being disciplined throughout the process. Now is the time to channel the irritating kid in high school who assiduously completed her homework, plus two or three gratuitous pages of extra credit daily. Be obsessive about planning ahead, clarifying objectives, poring over lease details, and for heaven's sake, get a team of experts on your side. Once it's all over you can go back to your old relaxed self, confident in a good lease and great office space.
Guest Writer for 42Floors