TOURING SELECTED SPACE AND NEGOTIATING THE LEASE
Commercial leasing is a complex process, fraught with significant potential risks and liabilities, and should be only handled by a representative that has both the necessary experience and your best interests in place. We have found tenants tend to overlook the importance of their creditworthiness and the time required to bring a commercial lease transaction to close.
Leasing commercial space is very comparable to getting a loan from a bank. Tenants should be prepared to share financial statements and to appropriately collateralize the lease transaction. Commercial real estate transactions, even for a seemingly “simple” deal, may take a considerable amount of time to successfully complete.
Having adequate time to identify, tour, design, price, negotiate terms on, construct or improve, and move into suitable commercial space helps shift negotiating leverage to the tenant’s behalf. Start the process 6 – 12 months before you need to occupy your new space.
The best space is the space which meets unique criteria that vary by industry, property type, the nature of the user’s business and their business plan, and location. We ensure a successful process by taking the time to understand the intricacies of our clients and their businesses up-front so the real estate supports these needs and requirements.
Upper floors of a building are more expensive because they may have better views than lower floors. Upper floors can also be quieter with less street noise. Of course, this may not apply to very old buildings that do not have elevators, since the upper floors are not ADA accessible.
Many questions have an asterisk* and a “it depends” response. This is one of those. Depending on the size of the space, office intensity or open area changes this dramatically. Use our space calculator to dial in a closer number. An open office environment will be in the 120 – 180 SF/person range and an office intensive environment will be 200 – 275 SF/person.
We get this question on every engagement. What does the space need? Carpet and paint? Walls demo’d and built? Kitchen added? New ceiling grid and lights? This is often a key component of a negotiation and a lever we expertly negotiate on a strategic basis for every transaction.
The best practices in negotiating a lease are summarized into four critical path items as follows:
- Start your needs analysis and discussion well before the need is estimated to commence.
- Engage an expert commercial real estate broker with proven experience and leverage their knowledge; we are here to help you starting with the needs analysis and continuing through build out construction to initial occupancy throughout your lease term.
- Always have a solid back-up option at hand, especially in an improving real estate market. Being prepared to walk away is a very powerful aspect of successful negotiation.
- Engage a real estate attorney to provide counsel and revise the lease document.
Your real estate broker should be well versed and provide assistance in mitigating latent/hidden costs within the lease agreement. The primary area of hidden costs arise from Operating Expenses or Common Area Maintenance (CAM) charges and maintenance obligations. Other potential pitfalls include Tenant Restoration requirements, Tenant Alteration processes, landlord administrative markups, and property management fees. Benchmark Commercial’s experience negotiating thousands of lease agreements is invaluable to our clients in these areas.
The best way to compare offers is on a Net Present Value (NPV) basis and $/RSF and per head or cubic foot basis with a matrix for a side by side comparison. This analysis should also take into account intangibles such as building image, proximity to employees and clients, ease of ingress/egress, and the true cost of occupancy including any tenant contributions to build-out and relocation costs.
There really is no ‘best time to move in’ for commercial space like there is for residential. Most of our clients want to consider their workflow and schedule a move when it would be least disruptive for their clients or business. A title company, for example, may want to move in the first half of the month instead of the last half and definitely not close to the end of a quarter or end of the year. An accounting firm would likely avoid moving during the busy tax season.
Approximately 40% of the companies we represent with their leases end up renewing or staying in their existing building. Part of what we do is educate and view the market and look for alternatives that improve the clients current situation. Often times the existing situation is the best. But by looking at other options we have legitimate backups if something doesn’t work out and we build the leverage for the renewal on more attractive economic terms.
Turnkey tenant improvements mean that the landlord is responsible for costs (known and unknown) associated with providing specific improvements identified in a Work Letter or other attachment to a lease. The upside to the smaller tenant is that they probably won’t be faced with unknown or unplanned increases in costs over budget, nor will they incur the cost or time investment to project manage the work on the improvements. The downside is that the architect selected by the landlord may not be as creative as the tenant may want and there is less involvement with the general contractor to discuss possible options. Finally, changes to the Work Letter may be more expensive if they are requested after both sides have agreed to the scope of work.
Core and shell space is usually newly constructed and will require substantially more work at a greater cost to finish since very little, if any, of the basic infrastructure is completed, i.e., plumbing, electrical wiring, lighting, HVAC, finished floor, finished walls, finished ceiling, plumbing, or insulation. The basic structure is provided by the builder or landlord and the buyer or tenant has an almost blank canvas to work with to match their needs. Depending on what the tenant may want to have built, this additional cost could be substantial.
Price per SF is the way most landlords quote their rates, but the prospective tenant will want to know what their cost will be for the space on a monthly or annual basis – the overall price.
All-in cost is a way to compare the relative cost of Full Service Gross space to Triple Net (NNN) space. All-in cost considers the other costs that are not included in NNN lease rates such as electricity, natural gas, water, sewer, Common Area Maintenance (CAM’s), insurance, and property taxes – just to name the most common. We ensure all costs are weighed during the decision making process.
A building that has common elements, such as a lobbies, corridors, shared restrooms, and elevators have a common area factor, also called a loss factor or add-on factor. Generally, office buildings have a CAF, and industrial buildings do not, as nothing is shared with other tenants in most industrial and retail properties.
Related to the common area factor, the actual space the company occupies in a building is the useable SF number (5,000 USF). The common area factor might be 15% of a building and therefore the rentable SF number would be higher (5,600 RSF) and tenants pay rent based on the rental square feet.
These are different ways to quote rental rates. Full Service (FS) ($30/FS) means all expenses are included in the FS rate. Triple Net (NNN) ($22/NNN) means the expenses, such as taxes, insurance, common area maintenance, snow removal, etc. are broken out separately and the quoted rate is the base rent only. Modified Gross (MG) ($24/MG) means a portion of the expenses are included in the lease rate. The specifics need to be clarified to confirm which expenses are/are not included and we work to make sure all costs are evaluated during the negotiation.
This is a space that has been cleaned up after a previous tenant has moved out. Usually, the carpet and walls have been removed and only the ceiling grid and lights remain in place, leaving a clean whitebox to start a new buildout.
To put it simply, our clients don’t pay us anything. Our commission or fee is customarily paid by the Landlord or Seller and is split between the Listing Agent and us, the Tenant Representative/Buyer Agent. We get paid a commission or fee when a transaction is closed. On sales, the commission is generally a percentage of the sales price. For leases, the commission is typically a percentage of the total rent over the term and is normally paid in two installments. The first half when the Lease is signed and then the second half when our clients occupy the space.
- This is another way of saying where the fiduciary responsibility rests.
- The leasing agent is often an employee of the building owner and advocates on behalf of the owner.
- The tenant representative is an agent for the tenant and advocates for the tenant in the lease negotiations.
- The buyer representative is like the tenant representative in that he or she is an agent for the buyer and advocates/negotiates for the buyer.
- The definition for a full service representative is different in that the services offered by the real estate firm are defined more than who represents the parties in the transaction. Here the difference is not where does the fiduciary responsibility rest but who will do the work of marketing and showing the property, for example, versus advocating/negotiating for the buyer/seller or tenant/landlord.
- Clear height – often over 30 feet
- Column spacing – usually 40 feet (or more) between columns
- Cross docks – especially important when the distribution is a major element of your business
- Larger truck plazas mean that is easier (and faster) for truckers to get in and out
The same may be true for offices, retail space, or any type of commercial property.
Of course, this all comes with a price. Unless you have a commercial construction background you may be fooled by the “steel building ads” that often don’t include the basics like land, utilities, entitlements, the interior finish, landscaping, and many, many more items.
It is usual for new construction to be more expensive than older spaces. You must be sure you need the advantages that are provided. We can help with tools that compare the cost to build vs the cost to buy existing. Or we can help evaluate the cost of leasing vs the cost of purchasing. We also have many contacts in construction, architecture, banking, or project management to ensure a timely and on budget project are deliverable.