Who has the time or money to make the wrong decisions when it comes to commercial real estate? Leases are longstanding financial agreements, so do you want your name on a deal that costs your company 10 years and millions of dollars?
For different organizations, the “right” CRE decisions will differ. However, there are tried and true measures that will protect your interests regardless of what you’re trying to achieve.
How do we know this? As tenant reps, we work with our corporate clients to identify their optimal CRE solutions. Working with a tenant rep is one of the best ways to avoid getting taken advantage of when negotiating your office lease. A tenant rep is a commercial real estate agent representing tenants, not landlords. As such, we only have your best interests at heart.
We have seen the issues our corporate clients have struggled with and compiled the dangers into a list so you can avoid that dreaded situation of someone asking… “and who did this lease?“
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Real estate is typically one of an organization’s top costs. Nothing can be left to chance. |
So, if you want to learn more about how to benefit your bottom line while finding the perfect commercial lease, read on. We will walk you through what corporate tenants should know before they sign their souls away on a commercial property that doesn’t fit their organization.
2. The Property’s Initial Condition
1. The Market in Your Area
Know the market of your area inside and out before signing a lease. You should have absolute clarity on the going rates for rent, what types of properties are in demand, and what landlord concessions are typically offered.
Because, once you have this knowledge, you can use it to your advantage when it comes time to negotiate your office lease. For example, if you know that corporate tenancy is in high demand in your area, you may be able to get a better deal by threatening to take your business elsewhere.
Or, if you know that commercial landlords are typically willing to give tenants a few months of free rent, you can ask for this concession (among others) when negotiating your lease. So, take the time to learn about the market in your area before you start negotiating your office lease. It could make all the difference in getting a good deal.
The bottom line is that knowledge is power in commercial real estate leasing. But, how do you get this knowledge- the landlord’s broker? Of course not. They have a fiduciary to the landlord. To get clear, usable information, arm yourself with a Tenant Rep. As un-conflicted brokers, they don’t owe anything to the landlords of the properties they show you. As a result, they can drive tougher negotiations with decades of market knowledge under their belt. Similarly, they will show you more sites since they don’t have their hands in a particular landlord’s pot.
2. The Property’s Initial Condition
Another key point of your lease negotiation is the property’s initial condition. Not knowing where your work letter starts and stops can cost you millions.
For example, more renovations are required to get the property in working order if you’re looking at a cold dark shell.
As such, you’ll need to make sure you negotiate a fair Tenant Improvement Allowance (TIA), large enough to cover the cost of any renovations you’ll need to make. If not, your landlord will get away with making you pay for the construction elements of their building.
However, starting from the bare condition will also give you more creative control in determining how the space should fit your company’s needs. It will likely also give you more leverage to negotiate a higher TIA.
On the other hand, if you’re looking at a property that’s in readier condition like a warm vanilla shell, you may not receive as much money in your tenant improvement allowance. Again, this is because fewer renovations are required.
The property condition will also be the main factor in determining your build-out timeline. Cold dark shells will require more work, funds, and time before you can expect to move in.
3. The Important Lease Clauses
Knowing the essential lease clauses is critical to avoid any costly surprises down the road. Commercial real estate leases are complex documents with clauses drafted by sophisticated landlords, their brokers, and attorneys. Thesse teams are CRE experts who count on tenants being unprepared. Do you really want only your eyes on the document they draw up?
The clauses within can greatly impact your ability to use the space, how much rent you’ll pay, and what kind of repairs and maintenance will be required. As such, be sure to understand the terms before you sign. Because if you’re not careful, the language of your clauses could affect your ability to use them.
For example, every lease has a sublease clause. But, did you know that nearly 95% of the time they’re written to be inaccessible for the tenant? That is why a skilfully drafted sublease clause could save millions.
Or, if specific clauses are excluded from your landlord’s proposal, this will again invalidate your claim to exercise them.
It’s important to understand the nuances of your lease’s clauses before you sign.
Some of the most important clauses to be aware of are:
- The sublease clause
- The assignment and/or termination clause
- The rent escalation clause
- The usage clause
The most efficient way to ensure that your lease clauses are in your best interest is by working with a tenant rep. By working with landlords, brokers, and the documents they produce- tenant reps know what to look for that may poorly implicate your budget.
Handing this heavy responsibility to a knowledgeable party will reduce the time and stress of securing the most favorable leasing terms. This way, you’ll be aware of your rights and obligations under the lease and can avoid any clauses with stealthy costs.
4. How Long Your Lease Should Be
Before negotiating your term length, you should know how long your company is prepared to remain in this space. Similarly, you should consider questions including:
- Are you planning to downsize or increase your talent size?
- Is the market in your area stable?
- Is there a better location for your clients and team?
- Are changes in the market influencing what geographical spots are best for business?
- Will you need the same space in 5, 10, 15 years?
- How is your company performing?
- How can you best optimize your portfolio?
- Does it make sense to combine satellite offices within the same region?
Many factors will influence the optimal length of your lease. However, as a rule of thumb, organizations looking for more flexible/move-in-ready space should look for shorter-term leases.
On the other hand, if your company wants stability and has precise projections of its spatial requirements for the next few years, a long-term lease is right for you. With longer leases, you also have the leverage to negotiate for more perks like concessions or a lower initial base rent.
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Landlords usually prioritize long-term tenants because of the guaranteed cash flow. |
It also means less funds required for marketing, renovating, and moving a new tenant in for the landlord. As such, long-term leases usually carry less risk for property owners.
Arm Your Negotiation with a Tenant Rep
No matter what you need to pay the most attention to, it is key to remember that negotiation is required to ensure the lease benefits both parties (the corporate tenant and landlord).
The important thing is to know what you want and to negotiate a lease that is in your best interests. Don’t be afraid to ask for what you want and to walk away if the landlord isn’t willing to meet your needs.
And, if you’re not sure what you need, it’s always a good idea to consult with a Tenant Rep.
Tenant reps are negotiation experts. At iOptimize Realty®, we are tenant reps with over three decades of experience. We have been through the gamut of landlord negotiations and know what to expect. We can help you from the initial property search to ensuring you have the terms and budget you’re comfortable signing on.
