Whether your business growing so it’s time to expand or you are looking to downsize to really be more efficient with your space, I want you to move forward with full confidence. I want to share with you a few things that you should consider before signing your next lease.
For those of you that don’t know me personally, I actually grew up with entrepreneurial parents. My dad was a commercial real estate developer for over 20 years in the Phoenix area. I, of course, grew up with it from the landlord side, but since then, of course, helped many of my clients through landlord-tenant issues and signing their own leases, some for the very first time.
Finding the Right Office Space
Now, I want to talk to you about finding the right office space, because I know it can be a daunting task for the tenant, and that’s you. There are several issues that you should be addressing when first identifying office space, but also before you sign a lease because you should always understand what you are signing. If you take anything away from today – know what you’re signing. I’m going to share with you a few tips on my checklist to help identify certain pre-signing considerations that you, the tenant, should consider before finalizing a lease. What I’m going to share, however, does not need to be followed in strict chronological order. The categories and stages I outline overlap depending on the variables and your timeline for your particular transaction.
Finding an Experienced Broker
First up, finding an experienced broker. If you’re looking for office space, you should initially hire an experienced broker. A broker is a fundamental asset to a tenant at the beginning of the leasing process, especially because a broker brings many things to the table, including assessing your priorities for the new space. They can estimate the amount of space you might need to rent in order to achieve your operational goals. They can help you identify potential office space, and provide an analysis of the projected costs over leasing for the term for any space that you might be considering.
They also help you guide negotiations with the landlord and the landlord’s broker for any material issues that can be raised during the different stages of the leasing process. This might include the specific concessions that the landlord might offer. And I think this is a good place to pause because I want to remind you there are concessions. There is not a strict must-do way of doing business. There are norms. But some of those norms include concessions that you may not be aware of. They will also walk you through the security deposit and the need for you to offer a lease guarantee.
Keep in mind you and the broker should enter into a brokerage agreement that clearly documents the method and timing of payment for the broker’s commission. Typically, the broker receives its share of the commission from the landlord’s broker, who is paid by the landlord. So you do “pay” but it’s built into the lease because there is no such thing as a free lunch!
Conducting Due Diligence
Now, regardless of who is doing the research and supporting you with due diligence, I cannot emphasize more the importance of doing your due diligence. Once you find the right space, you, your attorney, and your broker are going to come together as a team to conduct due diligence.
Conducting due diligence can be expensive depending on the space. Make sure you ask the questions upfront so that you know what the anticipated costs will be before you begin. When doing due diligence, you should consider market conditions. Of course, that is something that we all have top of mind. Your broker and your attorney can advise you about the market conditions and the local customs for office leasing because it’s going to vary from not only state to state, but neighborhood to neighborhood. This information is so important for the tenant to conduct a lease negotiation effectively. You have to know what you’re working with.
Your broker can advise you on how the landlord measured the premises. There are various methods for the landlord to determine the size of the space, and your broker or attorney will be able to help you understand that. But something to note in case this raises any alarm, the word “approximate”, approximate square footage is customary because, of course, there might be a slight variation, depending on who measures and from what point in the room. Not all walls are completely straight and that is common. I mean, we can’t ever get completely perfect, that’s why I use the word approximately.
Next up, permits. You should determine whether in the letter of intent stage if there are any additional permits that must be obtained for occupancy or the initial build-out. You will need to know: who is responsible for securing any of these permits, and any additional cost with the issuance of these permits (clearly stated in the letter of intent).
Common Area Maintenance Expenses (CAMs) – Unlike operating expenses with running your business, CAMs are the utilities, the taxes, and other expenses to maintain the common areas.
Understanding the CAMs, will help you assess the full “all-in” additional costs that may be added to the rent, like heating, ventilation, and air conditioning (HVAC). NOTE: You should consider having an expert come out to consult you on whether or not the current scope of available HVAC in the space is sufficient for your needs. This might include even making sure that there are not any repairs necessary required because it is very common for any cause of maintenance to be passed to the tenant in the lease. For this reason, you want to make sure that you do a thorough inspection before you sign your lease and request any maintenance be done to bring it back to fully functioning condition, maintenance, and repair **before your lease term begins**. Now, this goes along with what we talked about with the ABC. But make sure you outline what you are about to be responsible for inside the space for continued maintenance and repair and make sure that if something is not in good condition, that you take care of that upfront and see if you can request the landlord cover the cost. Each of these things is fundamental to finding a space that will serve your team and set you up for success.
Negotiating Letter of Intent
Another item on the checklist is negotiating the letter of intent. Now, the word negotiate may seem intimidating, but finalizing the letter of intent in the early stages of the leasing process will create ease and fluidity through the rest of the process to signing. The letter of intent generally sets out the business terms agreed to in the transaction. The letter of intent should clearly specify if it’s binding or non-binding. By effectively negotiating your letter of intent, you as the lessee and your landlord as the lessor can reduce the time involved in finalizing the lease itself, avoid miscommunications or misunderstandings between the parties, and create deadlines for important events.
Negotiating and Finalizing the Lease
Next, negotiating and finalizing the lease that is the last step before the big finale, so here is what you can expect. The landlord’s attorney typically drafts the initial lease draft and sends it to you for your review. Of course, I would suggest that you work with a local attorney to have them review the lease. You can send a markup of the initial draft outlining your initial objections to the landlord’s form of the lease. Usually, these objections (aka – “redlines”) are items that don’t align with the letter of intent. The markup details your objections to specific lease clauses. Depending on the scope and complexity of the lease transaction, the parties can go through multiple redlines. Keep in mind the landlord wants a tenant that runs their business with intention. The redline process is not to upset anyone, rather just to ensure that you are all on one page.
Right Before You Sign the Lease
After the final redline, you should review the lease one last time to ensure the final lease form reflects the material terms agreed to by the parties. Here are the ones I want you to pay special attention to: rent payments, security deposit, the term of the lease and any extension options, the commencement date, any contingencies (aka – anything standing in between you and you moving in), and the expiration date (plus any options to extend and when you have to give notice), a description of the premises, and permitted uses (including any exclusive use rights to make sure that you don’t end up with a competitor right next door).
Entering into any contract can be intimidating, including a lease that usually is that for a longer period of time and it’s not something to be taken lightly. If you have any unanswered questions, head on over to our private Facebook community, where we will dive into this conversation a little bit deeper.