Tip Number 1: Define and Understand Your Needs Before You Start Your Search.
An inability to define or understand your needs at the outset can result in a variety of problems. These include space that is not as functional as desired, a failure to meet image goals and unneeded employee morale problems. It pays to take the time to discuss the details of your needs with key employees, a real estate professional and your space planner.
Tip Number 2: Fifteen Negotiating Tips For Tenants
1. Be prepared.
2. Know your goals.
3. Create a sense of urgency for the other party-set a deadline.
4. Know your options-have other alternatives available.
5. Do not let your enthusiasm to make a deal make you a bad negotiator.
6. Lawyers are paid to keep you out of trouble, not tell you what to do.
7. Negotiating is not about winning-it is about getting what you want.
8. Start early-allow enough time to negotiate elsewhere if necessary.
9. Identify the other parties primary issue-stand in the Landlords shoes.
10. The person who gets the most emotionally involved has the least power.
11. Incorrect assumptions are a primary cause for most failures.
12. Negotiate on your turf or neutral turf.
13. Stay open-minded, creative and flexible.
14. Be honest and direct.
15. Find out how others have fared in negotiations with the other party.
Tip number 3: Read the Lease (including all exhibits and regulations) Prior to Signing!
Once you have worked with your leasing representative to hammer out the most advantageous letter of intent, this is the most important task. READ THE LEASE. Look for (i) standard provisions in the Lease form that would be a problem for your business (a ban on any suite signage other than the building standard, a provision that the front doors of the building are locked on Saturday and you occasionally have clients who have appointments on Saturday, etc.)
Tip number 4: The Forgotten Part of the Lease - Rules and Regulations
The smart tenant, the good broker, and the efficient attorney will always read the entire Lease. Not because it is fun reading but rather to understand the potential ramifications that could be set in motion should some unfavorable clause actually come into play. The key is to catch the problem BEFORE it occurs.
While everyone always reads the summary page, most read the next ten to fifteen sections, only a few get through the dry sections sixteen to infinity, few REALLY read the Rules and Regulations. After all, it is mostly non-issues like "Tenant may not have sales" or Tenant can not have pets." Well, SURPRISE! Some of these hidden issues may actually impact you as a tenant. Read the Rules and Regulations as carefully as you do the rest of the Lease.
Can you cook in your suite? Most say you can not. Seems microwaves were not invented when most leases were first drafted. What are your building hours? If it says 8 AM to 6 PM, what happens if you want to come in early or stay late?
Read and understand the Rules and Regulations!
Tip number 5: Devil in the Details-Lease Insurance Clauses
One clause in the lease that always seems beyond normal comprehension is the Insurance Clause. Even some of the best real estate attorneys simply tell their clients to have their insurance agents read the clause before signing the lease (we have been recommending that for years).
You have had your agent read the clause, you now have the insurance in place, but what is it most tenants forget? The lease probably requires you to name BOTH the landlord and their "agents" (sic. Property manager) to be named as an "additional insured." That is standard. Then the tenant is typically requested to send a copy of the certificate to the property managers office. The big hit comes in that failure to do so can be a default on the part of the tenant. While most landlords with simply call you if that don not have the appropriate information on file, do you want to risk that? Check both your lease and your insurance policy TODAY.
Tip number 6:
Tip number 7: Put Your Emotions Away When Looking For Space
Remember buying your first house? The Realtor® probably closed the deal by asking "So what color would you like your bathroom?" A sale is, unfortunately, an emotional thing. Once you get the buyer emotionally attached, you have them locked. Don not let that happen to you when dealing with commercial real estate, especially in todays strange and changing market. Pay more attention to utilitarian issues such as space layout, future growth, general location and economics and less on image and other emotional issues.
We are not saying image is not important, but who ever thought financial companies and large law firms would EVER move away from their ivory tower high rises into two story tilt-ups? With landlords less likely to pay for tenant improvements, you may need to either put in your own cash or live with what you have.
How would you like to be the guy who moved into the big corner office in a certain office building only to find out the "building they would never build" now blocks your view of Mt. Baldy? Funny thing, the office still functions but the view is gone. In some Far East cultures, that is a sign of a more productive environment, in fact, they prefer to put more productive people on the inside rather than have a window. While the outside of a building may not be as appealing as you would like, we have seen wonderful things done to the inside to create a great working environment. An architectural firm converting an old boat house.an ad agency converting an old Victorian.
In todays market, the key is to clearly define your usage, budget, and location. Be flexible on the rest and all will fall in place.
Tip number 8: Get all of the Space for Which You are Paying
It is surprising how quickly even small measuring mistakes can add up to big overcharges in rent. Apply BOMA standards to make sure you are getting all the space you are paying for. And have your space planner verify measurements.
Tip number 9: Operating Cost-pass-through methods
With an operating expense cost-pass-through, more rent will have to be paid as building operating expenses increase over a base year and cost-pass-throughs take effect. You should compare past years increases in your analysis of alternatives, make sure the starting point is appropriate and place a cap on annual increases, if possible. Be aware of what calculation method is normal in your market.
Tip number 10: You should not have to pay rent during the time you can not use your space.
What would you do if the elevator broke and your customers could not reach your office? What if a fire on another floor prevented your employees from reaching your office, or if the ceiling collapsed because of a water leak? It would at least be difficult to operate your business and you certainly would not want to pay rent during those times. But many form leases require you to do just that. Make sure that your lease states that your obligation to pay rent stops (the legal term is "abates") during the time you are denied reasonable use of, or access to, your space.
Tip number 11: If your business is not open because one of your employees damaged the property, you should not have to pay rent during that period.
Finding fault has no business in modern-day commercial leases. Still, most form leases require you to pay rent if you or your employees are at fault for damaging a leased property. In fact, liability for negligence should rest with an insurance company. Properly drafted clauses should shift the risk for such events to the parties insurers.
Tip number 12: Protect yourself from your landlords insurance company.
Suppose one of your employees accidentally starts a fire that causes $5 million damage to your building. The landlords insurance company pays to repair the damage, but then sues you to recover the $5 million that they paid. In most cases, you will be responsible for paying the insurance company unless your lease states two things: (1) The landlord waives her right to recover losses and to any claims against you; (2) The landlords insurer also must waive its right to recover losses. (The legal term for this clause is "waiver of subrogation.")
Tip number 13: Make sure your rent payments are going to cover building operating costs, not inappropriate expenses.
There are several ways you can protect yourself from rent payments that are higher than they should be. First, attach a detailed list of items that you want specifically excluded from operating costs. These may include capital improvements, higher-than-customary executive salaries, mark-ups on utility expenses, overhead for staff and above-market payments to affiliates of the landlord. Second, insist on your right to audit the landlords records. Sometimes it is also useful to limit the maximum size of operating cost increases you will absorb each year.
Tip number 14: Be sure your agreement allows you some discretion should you ever want to sublease or transfer your lease to another company.
There are a host of legitimate business reasons why companies transfer lease rights: companies are sold, they outgrow space, they downsize or form strategic alliances and sublet space to a new partner. Most standard leases give landlords absolute discretion over transfer decisions, even those made for legitimate business reasons. Make sure that your lease requires the landlord to be reasonable-at a minimum-in consenting to a transfer. In some cases, such as a merger or sale of the business, no consent should be required. (Beware: some landlords reserve the right to terminate a lease and take back the space if a lease transfer is simply proposed.)
Tip number 15: Your lease should describe in detail the condition of the space you are leasing and all services for which the landlord is responsible.
The law in most states recognizes that when someone signs a lease, they accept the property in its existing condition unless the lease specifies otherwise. Furthermore, a landlord may not be obligated to provide services to a tenant. For these reasons, it is important to carefully describe the expected condition of the premises and list such services as hot and cold water, heating, ventilation, electrical power, restrooms, elevator service, building maintenance, janitorial services and any others you expect the landlord to provide. It is also a good idea to agree in advance on rates or charges, if any, for services delivered after "normal hours."
Tip number 16: Always seek the advice of an experienced insurance professional to make sure your interests are adequately covered.
Comprehensive insurance coverage for both you and your landlord is crucial to a fair lease. An experienced insurance agent will advise you on coverage to protect your property and interests. Be sure that your company carries all coverage specifically required in the lease. We know of a case where a tenant forgot to clean the roof drains on a property he leased. When a record rainfall came, the roof collapsed. The tenant was found liable for the $500,000 bill for repairing the roof. Unfortunately, he neglected to carry the proper insurance policy that would have protected against this loss.
Tip number 17: Ask for the right to fix a problem when your landlord does not and to offset your costs against future rent.
Generally, there is very little you can do under the law if your landlord repeatedly does not carry out her duties specified in the lease, unless the landlords actions go so far as to prevent you from using your property. However, if you state in your lease that you can fix a problem if the landlord does not, and then reduce your rent payments by the amount it costs you, you provide an incentive for the landlord to do the work herself.
Tip number 18: Protect yourself from the chance that the landlord's lender would terminate your lease.
Anyone who is investing significant sums to improve a leased space or believes the location of a property is critical to a business should be particularly concerned about this point. A landlord's lender can terminate your lease by foreclosing its mortgage on the property. But there are two steps you can take to avoid the problem. First, insist that the landlord obtain an agreement from her current mortgage lender not to terminate the lease (a "nondisturbance agreement"). Second, make sure the lease says any future lender that acquires the property through foreclosure cannot terminate the lease for undue cause.
Tip number 19: Carefully Negotiate the Common Area Maintenance (CAM) Section.
For example, some leases permit the landlord to pass through both an outside property management fee as well as a hefty "landlord administrative charge." Those costs really add up but you can often convince the landlord to drop the administration charge if you catch it prior to signing the Lease.
Tip number 20: "Trust"
Never rely on "trust" or a handshake on matters very significant to your new space. For example, let's say you need a sign on the exterior of the building and the landlord says "that shouldn't be a problem, sign the lease and we can work on the details later." If the sign is important to you, stop right there and get agreement on the size, location, color, lighting, etc. of the sign and have the details included in the Lease.
Tip number 21: Carefully Review Operating Issues
Think about the mechanics of how your business operates as you are reading through the Lease. Watch out for issues like (a) after hours HVAC service - is it available and how much will it cost, (b) do you make higher than normal levels of noise at particular times, (c) your employees love to cook popcorn in the micro-wave in the afternoon and that is strictly forbidden by the Lease.
Tip number 22: Options to Extend the Term
If you want an enforceable option to extend, make sure that either the rent for the option term is stated in the Lease or that there is a detailed arbitration provision which will establish the rent if the Landlord and Tenant are not in agreement on it. Otherwise it will be unenforceable.
Tip number 23: Notice and Opportunity to Cure
Make sure that you are entitled to written notice of a default and a period of time to cure the default before the landlord is entitled to take any action against you. For example, it is customary for the tenant to get 5 days to cure a monetary default and 15 days to cure a non-monetary default; provided that if it cannot reasonably be cured within that period of time, the Lease should provided that you are safe if you commence the cure within the 15 day period and then diligently work to bring the cure to completion.
Tip number 24: Consents
Try to get the landlord to agree that in cases where you are required to obtain their consent, it will not be unreasonably withheld.
Tip number 25: Notarization
Make sure the landlord's signature on the Lease is notarized if it is longer than a year. Otherwise, according to some State's laws, the landlord may be able to terminate the lease if it becomes advantageous for him to do so.
Tip number 26: Condition upon Return
Occasionally leases require the tenant to return the premises at the end of the Lease term in the same condition as when they were at the beginning. Be sure to qualify that "with normal wear and tear and any damage by casualty excepted."
Tip number 27: Security Deposits
As markets around the country tightened and then weakened over the past few years, security deposit requirements flowed from the typical "last months rental" to anywhere from three to 18 months of rent and then back to "last months rental" for all except startups. Many landlords have been "burned" by startups and dot coms and are very cautious in securing their leasing expenses when negotiating with them.
How to alleviate the problem for startups? Some landlords are accepting letters of credit or alternative guarantees. Your financial statement and creativity is the key.
Tip number 28: Level the Playing Field
A Tenant renting office space does so only a few times in his corporate life. A landlord rents space over and over again. Level the playing field by taking advantage of the availability of a good tenant representative. You will find that there is usually no cost to you. In the long run, you will end up way ahead in not only the rent you pay but also in avoiding mistakes.
Tip number 29: Ten Ways of knowing you had better go back to the drawing board
Time to take a rather humorous look at the property search itself and help you know if you are on the right track or not. No harm or malcontent intended, just a little fun based on comments from our clients previous and often unfortunate experiences which they shared with us after we started working with them.
1. While the size of the spaces you are shown seem OK, none are laid out remotely close to what you need.
2. When you ask if the suite can be remodeled, you are told, "Sure, no problem."
3. Your broker sends you a 50 page computer print-out of every building in a 20 mile radius and asks you to point out which ones you would like to see BEFORE meeting you or discussing your business.
4. The broker is so familiar with the buildings you are seeing that the landlords actually let the broker put his name or his companys name on a sign in front of their buildings.
5. The brokers cell phone burns up from calling ahead to landlords from his car with you in it to check on availabilities- assuming it is not one of those "friendly" landlords.
6. Three hours into the tour, the broker does not know the name of your company or what you do.
7. You tour so many properties you end up having breakfast, lunch, and dinner with your broker.
8. The sign on the side of the brokers car reads "Tours-R-Us."
9. You can stand to not hear any more stories of how many BIG deals the broker did.
10. At the end of the tour the broker assures you you will get your first choice building and hands you a reminder card to call him in five years.
Tip number 30: Relocation lease clauses
If you are a small tenant occupying less than 5000 feet on a multi-tenant floor of a nice office building, you may be exposed to the "we can move you any time we want" clause. Huh? What is that?
Simply, it gives the landlord the right to relocate you to another part of the building should they need your space for a larger tenant. Can not find it in your lease. You may be looking in the wrong place. Stop looking under "M" for "move" or "R" for "Relocation." One crafty landlord, or rather their attorney, hides the clause under "Building Planning."
Basically, this clause gives the landlord the ability to move you with little or no compensation. Yes, that means you may have to pack up, move, print new stationary, buy new furniture, live in a space that is not configured the way you want, and to add insult to injury, the new space may be larger than your old space for which the landlord may charge you the same per square foot rate.but for the larger space.
While it may not be unreasonable to allow the landlord to relocate you, demand concessions. Most landlords will pay for certain moving expenses. Demand EVERYTHING. If it is a reasonable cost caused by the move, the landlord should pick it up. The new suite should meet your needs and you should NEVER pay more in total rent despite any increase in size while your rent should decrease if the new space is smaller. If there is no suitable space, demand a termination clause AND compensation for the move.
Tip 31: Why capital expenditures in tenant pass-throughs should not be included in operating expenses and why tenants should do their best to keep such expenditures out of their leases.
Capital Expenditures - Includable or Not?
A hotly debated item regarding operating expense clauses in leases is whether or not capital expenditures should be oncluded in tenant pass-throughs. This tip will explore why these expenditures should not be included in operating expenses and why tenants should do their best to keep such expenditures out of their leases.
"What are Capital Expenditures"?
According to GAAP (Generally Accepted Accounting Practices), capital expenditures are the acquisition costs for items that:
Last beyond the current accounting period (the current year); and increase the value or the life of an asset. The best way to understand capital expenditures is to think of them as "investments" in its building that are intended to yield long-term benefits.
"Where Capital Expenditures Appear in Leases".
Most leases have operating expense / CAM (common area maintenance) provisions that require the tenant to share in the "pot" of building operating expenses. Operating expenses typically include maintenance costs, operation costs and other normal costs of the building. When it comes to capital expenditures, most leases have language that specifically addresses how they are to be treated.
The language may vary from lease to lease. This is partly because capital expenditures can take several forms including improvements, replacements and extraordinary repairs such as refurbishments and overhauls.
"The Rent Already Covers Capital Expenditures".
What is fair when it comes to capital expenditures? In most cases, the costs of capital expenditures should be borne entirely by the landlord. In order to understand why, one must first understand how the lease is structured financially.
Base rent is intended to compensate a landlord for the use of its building. The building consists of the entire structure, including all of its physical improvements, systems, equipment and other attributes. The owner's investment in the building is allocated to each year through depreciation. The key economic model for owning commercial real estate assumes that the negotiated (base) rent being collected is sufficient to cover the annual "use" as reflected by the owner's debt service and the building's depreciation.
Over the years, the many component parts of a building will wear out. Therefore, every component will, eventually, need to be replaced. So when a landlord spends money replacing a component of the building, it is simply replacing part of what the rent is already covering. There is no justification for including these replacement costs in the building operating expenses; to do so would be to charge the tenant twice for the item-once in the rent and again in the operating expenses.
Many leases contain a general capital expenditure exclusion, but then allow the inclusion of the costs of replacing an item where the expense of continued maintenance is greater than the cost to replace it. At some point in the lives of all assets, the wear and tear of normal use will become so great, or the passage of time will make them so obsolete, that the cost to repair and maintain them will be prohibitive as compared to their outright replacement.
Don't be fooled. This is exactly the reason assets are replaced. They have reached the end of their useful lives and need to be discarded and new, and perhaps more efficient, assets need to be acquired. This repair vs. replacement argument should not be used by a landlord to circumvent a lease's capital expenditure exclusion. When an asset is replaced, the replacement is a capital expenditure that should not be included in operating expenses.
What about repairs? Aren't they different from replacements? In many cases, they are. Small, routine repairs neither increase the value nor extend the life of the asset. However, if a repair is non-routine and rises to a level where the expenditure increases the value or life of the asset, then this constitutes what accountants call a "betterment" and the costs should be capitalized.
Capital improvements are expenditures for new items in a building, such as a new sidewalk (where one didn't exist before), a new security system, etc. Should any of these be included in operating expenses? Let's examine the various circumstances for these kinds of expenditures.
If a landlord puts in a new sidewalk, one can argue that the tenants are all benefiting from it, and that they therefore should pay for it. However, if these items can be included in operating expenses at the landlord's discretion, then the landlord is essentially improving its building using the tenants' money. Even though the tenant may receive a benefit from the new item, the tenant should, at a minimum, have the option of deciding whether it wants to spend its money on it. The landlord should first obtain the tenants' written agreement that if such an improvement is made, they are willing to pay for their share of it by allowing inclusion in the operating expenses. Without such approval, inclusion in the operating expenses is inappropriate.
Improvements Intended to Save Operating Expenses
Landlords are often faced with the prospect of buying equipment that can improve the efficiency of their buildings. For example, energy management systems can vastly reduce utility costs by managing the hours and extent of electrical equipment usage in a building.
Tenants should have no problem in including these costs in operating expenses provided the expenditure is spread out (amortized) over the improvement's useful life, and to the extent that the annual amortization charge is no greater than the money actually saved. Thus, it is acceptable for capital expenditures to be allowed for items that actually save other operating expenses to the extent of such savings.
Beware of clauses that say that capital expenditures are allowable if they are intended to save money, because almost anything can fit into that category. The expenditure must actually save money, and the landlord must be able to document such savings.
"Improvements Required by New Laws"
From time to time, laws are passed that require building owners to make improvements to their buildings (e.g., ADA, fire safety codes). These are unexpected expenditures on the part of the landlord, and a good argument can be made that the tenant should pay for them because they are not factored into the existing rent structure. However, an equally good argument can be made that having to fund such improvements is one of the risks of building ownership, and that the tenant should be insulated from such risk. The tenant may enjoy use of the new improvement for a short time (during the balance of its lease term), but it is the landlord that now owns the new improvement forever. Why should the tenant be required to pay for it?
"Spreading the Cost Out over the Useful Life"
In any case, any time that capital expenditures are allowed to be included in operating expenses, the cost must be spread out over the useful life of the expenditure. Remember that these expenditures are essentially investments in the building, and are expected to yield benefits for many years. Sound accounting principles require that in order to accurately measure and report the financial performance of an investment in real estate, the cost of such items must be allocated to the time periods they benefit. Doing so also avoids the inequitable result of having a tenant pay for the entire cost of such an expenditure in one year even though it may not be in occupancy to enjoy the benefits thereof in future years.
Capital expenditures can take the form of extraordinary repairs (such as refurbishments and overhauls), replacements and improvements. Except where the expenditure actually saves other operating expenses (and therefore has no net impact on the tenant), tenants should not allow the inclusion of such expenditures in operating expenses. These are investments in the building. They are already anticipated and covered by the existing rent and are yield long-term benefits to the landlord almost exclusively. If, through negotiation, any of such expenditures are allowed, at a minimum they must be spread out over their useful lives so as to minimize the single-year impact they may impose.
See Also:Tenant Representation Process | Using a Tenant Representative | Costs of Leasing Office Space | The Leasing Process and Timing | Questions to ask Tenant Representative | Commonly Asked Questions | Hints for Lowering your Rent Expenses | Exclusive Representation Agreement