Negotiating an office lease is one of the most overlooked aspects of the office leasing process. Many companies spend a great deal of time finding the right location however spend very little time negotiating, thus leaving a lot on the table and potentially putting themselves at risk later on.
Whether you are a new business renting office space for the first time or an existing company looking to open another location, your office lease will be one of the most important things you set up. A poor lease contract can be financially draining even if you’re hitting your sales goals.
In this article, office lease experts Austin Tenant Advisors will talk about how to negotiate an ideal office lease. As you deal with potential landlords, be sure to refer to the tips below.
What is a Commercial Office Lease?
A commercial office lease is a contract between a business tenant and a landlord for the rental of property zoned only for commercial office use. Most businesses will choose to lease office space instead of buying it because it requires less capital. Commercial office leases are more complicated than residential leases.
Even if you have been successful at negotiating 100’s of residential leases, it’s important that you do a ton of research before going up against commercial landlords. There are many nuances of office leases. Just to name a few, lease terms and conditions are negotiable but vary from lease to lease, terms are typically longer (avg 3-5 yrs), rates are higher, tenant improvements are more expensive, and there are many more parties involved.
Types of Commercial Office Leases
When talking to different landlords and/or their agents, you will hear them quote lease rates differently. In most situations, they will either be quoting a gross lease (aka full service) or a Triple Net (NNN) lease. It’s important to note that tenants won’t have the ability to negotiate the type of lease structure that the landlord uses. In most cases, landlords today either use or are moving toward a NNN lease as it’s easier for them to manage and pass increases to tenants.
Gross Lease (Full Service)
In a gross lease, the tenants’ base rent includes every operating expense for the building, including property taxes, insurance, common area maintenance, and utilities. Because of this, the quoted rent appears to be higher than a NNN lease. An example would be a landlord quoting $40 sf gross.
Triple Net (NNN) Lease
In a triple net lease, the tenant pays a base rent plus its pro-rata share of property taxes, insurance, and common area maintenance. This is the most favorable accounting method for landlords since the landlord would be able to more easily pass along NNN increases to the tenant. An example would be a landlord quoting a base rent of $30 sf plus $10 sf NNN.
Start The Process of Finding Office Space Sooner Than You Think
The biggest mistake most companies make is waiting until the last minute to find office space for lease. Ideally, start looking for office space at least 4-6 months before your ideal move-in date or before your existing lease expiration date. This will give you time to find space, negotiate the proposal and lease contract, and build out the space if needed. If, during the negotiations, you determine that the space will need significant tenant improvements, then start the process sooner.
Determine Your Needs
Before you even start searching for office space, settle on a budget and determine what are actually needs vs. nice to haves. For example, you want to make sure you have the ability to assign the lease in the event you sell the company. You also want to avoid shiny objects and stick to a pre-planned budget.
Get a Commercial Real Estate Agent & Attorney to Help
There are no benefits to trying to do this on your own. Hire a commercial real estate agent that specializes in tenant representation to help you. Their service is free. Landlords pay 100% of commissions to their agent if you don’t have one, so you might as well put some of that to good use for you. They will help you find space easier and have the experience, tools, and resources to ensure you negotiate the best deal possible. It’s also a good idea to have a commercial real estate attorney review and negotiate the lease contract along with your agent.
Negotiate More Than One Location at a Time
Don’t put all your eggs in one basket. Just in case one option has multiple offers, and your probability of leasing it is slim, you want to make sure you have other options to choose from. Also, having more than one option on the table gives you leverage during negotiations with all the landlords. It helps create a competitive environment between them and ensures you get their best offers.
Never Take The First Offer
Landlords never give their best offer upfront. Always counter their proposals with concessions that benefit your best interests and needs. Come in at least 15% to 20% below their initial offer. After that, you can negotiate a number in between that works for both parties.
Check The Square Footage
Landlords will market an office space for rent as a certain size in square feet. During negotiations, it’s a good idea to have this checked by an architect or space planner to ensure you don’t end up paying for square footage that doesn’t exist or that is unusable. Most landlords will quote a size as rentable square feet, which calculates the size of the actual space plus the pro-rata share of the common areas such as lobbies, hallways, and bathrooms.
Longer Lease Term Better Concessions Shorter One More Flexibility
If you are a startup or new business, shorter lease terms give you more flexibility in case you grow and need more space sooner than later or so that you’re not on the hook in case things don’t work out. Longer lease terms will net you more concessions such as free rent, tenant improvements, and other options; however, make sure your company is more stable and profitable.
Ask For A Cure Period
A cure period is the period of time you have to fix a lease default. For example, if your rent payment is late. Make sure you have time to cure any defaults to avoid being subject to fines or legal actions.
Have a Sublease and Assignment Clause
It’s important that you have the ability to sublease in the event business is not working out, and you need to get rid of the space, or your company may have grown faster than you thought, and the landlord doesn’t have any more vacant space in the building, so your only option is to sublease the space and relocate.
In the event you sell 100% of your business or give a portion of shares of it, you need to make sure the lease language is flexible enough to accommodate your needs.
Finding office space for rent and negotiating the commercial lease contract can be daunting; however, as long as you give yourself plenty of time and hire the right team to represent your best interests, you will avoid costly mistakes and negotiate the best deal possible.
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