Real Estate Articles
Negotiating Office Leases (2 of 2)
Written by Brent Pace for Gaebler Ventures
This article is to help the entrepreneur learn what a Landlord is looking for during a lease negotiation process. By learning the Landlord's point-of-view, an entrepreneur can negotiate good lease terms with greater success. Part II emphasizes lease rate and type (NNN, Full Service, Base Year), Tenant Improvements, and Options.
Part I of "Negotiating Office Leases" discussed the first two levers a Landlord looks at when leasing: credit quality of tenant, and length of term. In Part II we discuss three additional key levers: Lease rate and type (NNN, Full Service, Base Year), Tenant Improvements, and Options.
Lease Rate and Type.
Do plenty of market research to ensure that the rate you are receiving from your Landlord is in line with the market. Brokers can be very valuable in this respect, since they are close to many deals.
The simplest type of lease is a "triple net" leases. These leases do not include utilities, operating costs, or taxes. Simply put, it's the base rent. The Landlord will charge you for the other items, or arrange for you to pay for them directly. Try to get a triple net deal if possible and then ensure you are leasing in an efficient building to avoid overpaying in maintenance. You can request historical operating costs to analyze the total cost of your lease.
Often times a landlord will try to get you into a "full service" or "gross" lease. These are all-in leases. The number quoted is what you pay. Remember, though, Landlords don't take risk without being compensated for it. If they cover the operating costs, they are certainly putting in a hedge for themselves.
Base Year leases are complicated and involve picking a specific year as the baseline for your expenses. Avoid this type of lease unless you have an expert broker.
Leasing a space "as-is" is almost always your best option. Construction build-out takes time, and costs can get out of control. Usually a Landlord will give you a Tenant Improvements allowance (TI's) for your space. If you exceed your allowance, it comes out of your pocket. TIs can be expensive for you and the Landlord. Avoid them and lease a vanilla space if possible.
TIs reduce profitability for the Landlord. Use this knowledge to your advantage. Negotiate TIs for your space, then offer to take it as-is in exchange for a reduced lease rate. This is a savvy move, and most Landlords will be happy to do it. Or you can try to get the Landlord to apply the un-used TIs to your rent payments.
Don't forget to negotiate options in your lease. Options to renew are a great hedge for you, and they're free. If the renewal option rent ends up being above market, don't exercise the option and re-negotiate your lease. If it's below market, you exercise and pocket the difference. Landlords will give renewal options to avoid having space turnover which requires more TI expenses.
Options to expand can be very important for a young growing company. When you tour a space, check adjacent spaces. If you can get an option to expand it allows you to reserve space without paying for it. In the current market, Landlords having significant vacancy issues will probably be willing to hold some extra space off the market to get your business.
If options to expand are unavailable, then a right of first offer or right of first refusal is the next best thing. These two items obligate your Landlord to notify you and give you first shot at a space before leasing to an outside party. This can be especially useful for adjacent space that you would consider for expansion. In most cases the Landlord is fine to do this since it doesn't cost them anything.
Negotiate hard for your space. In this market, tenants have the advantage as Landlords across the country are experiencing very high vacancy and falling lease rates. Take advantage and lock in a quality deal that gives you options for growth. Happy hunting!
Brent Pace is currently an MBA candidate at University of California at Berkeley. Originally from Salt Lake City, Brent's experience is in commercial real estate development and management. Brent will have tips for small business owners as they negotiate their real estate needs.
Share this article
Additional Resources for Entrepreneurs