When it’s time to sign a lease for office space for your business, you might be surprised and overwhelmed by the size of the multi-page document and the amount of provisions it covers.
We asked Jon Rosan, who has over 20 years of commercial real estate experience (and is also our General Counsel here at Swift Capital), to share some of the tricks of the trade when it comes to negotiating a commercial lease for office space.
The first thing to keep in mind when you’re looking at office space, is you’ll probably have more room to negotiate than with retail space where there isn’t as much wiggle room. With retail, you typically pick a spot based on its location and the landlord knows that so you don’t have much leverage.
But, with office space, there are many more opportunities to save money (or unnecessarily spend money if you don’t know what to look out for). Here are ten things to consider:
1. Negotiating Rent
Office space is generally priced per square foot. First, and most obviously, try and pay lower rent. However, in some cases where a landlord may not be willing to lower the “rack rate” of dollar per square foot, they might be willing to offer you a certain number of months of “free rent.” The landlord can still tell their investors or lenders that they are getting X amount per square foot while you pay for less and reduce your overall cost.
2. Operating Expenses
Most landlords will add operating expenses to the base square foot price. These might cover costs such as snow removal, landscaping, maintenance, utilities for common areas, and/or window washers. If you can get your landlord to include the operating costs in your base rent, that’s great. If that’s not an option, you can ask that expenses be calculated with a “base year.” That is, no operating expenses for the first year of the lease and then you as the tenant only pay for increases to these expenses in subsequent years over the base year.
3. Tenant Improvements
Some landlords keep funds on hand in their annual budgets for tenant improvements to their properties. By asking if your landlord has set any money aside for tenant improvements, it could mean less cash that you have to pay out of pocket to get your space move-in ready.
4. Working With a Broker
In many areas of the country where there are either many office options or space is tight, it makes sense to work with a commercial real estate broker who can bring expertise to the table. Strange as it may sound, almost always, fees for the landlord’s broker and your broker, are both paid by the landlord. Therefore, it may not cost you anything to get a professional’s guidance and insight.
Make sure that you understand what would happen if a major system fails, like the HVAC, plumbing, or electrical. Who will be paying for repairs? Most HVAC systems last about 10-15 years. Knowing how old the systems are when you’re entering a lease will give you a head’s up that something could go wrong sooner rather than later. Plus, you’ll need to know who’s responsible for picking up the tab.
6. Hours & Accessibility
If your business operates during non-regular hours, think about how this could impact your lease and expenses. Will the building be accessible during off hours? And if so, is there a fee or an increase in operating expenses for the ability to access your space during off-hours?
It’s essential to make sure that there is enough parking at the location. Before you sign a lease, drive to the space at 11:00am (when parking areas tend to be at capacity) and check out the parking.
8. Hidden Costs
Be sure to ask about access to high speed internet, also known as fiber. You’ll want to know where it comes into the building and how easily accessible it is, especially in a multi-tenant building. You’ll also want to ask about electricity, and understand what you’re responsible for: the overhead lights? The plugs? Both? And finally, are there any additional costs related to building security or operation?
9. Right to Extend & Sub-Lease
You can always ask to include a “right to extend” in your lease. This can be beneficial for both tenants (who don’t want to relocate their business) and landlords (who don’t want to incur the costs of finding a new tenant). A right to extend can give you more options when your lease is up, but it’s often best to negotiate the terms of the extended rent upfront. Also be clear on what your sub-leasing options are in case you need to move out of the space before your lease ends. Some landlords are more open to subleasing than others.
10. Growth Mode
If you see your business growing over the short-term, it’s a good idea to get a sense for the other tenants in the building, when their leases are up, and whether they plan to stay or move out. This will give you the inside track on whether there is potential to expand into vacated space. If there isn’t room for growth, you’ll want to be prepared because you may need to move.
Like any other major transaction, don’t be intimidated by what you don’t know. Ask a lot of questions and work with an expert when it makes sense.
Jon has nearly 20 years of experience as the General Counsel for start-up and emerging growth companies. Before joining Swift, he was the General Counsel of Rosetta, and And 1, as well as the Vice President of Business Affairs and General Counsel for the International Fight League. In addition to his legal responsibilities, for many of these companies, Jon managed their real estate portfolios.
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