A tenant rents office space only a few times in their corporate life, while landlords rent space over and over again. Keep an eye on these 9 issues that are frequently overlooked and you are more likely to end up with a happy ending.
Carefully Review Your 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?;
and, (c) your employees/Tenants love to
cook popcorn in the micro-wave in the
afternoon and that is strictly forbidden
by the lease.
Don’t Neglect the Workletter
There are 3 main components to a lease
agreement. The business points, the
legal points and the workletter. The
final negotiation item is the Workletter.
In many cases, the landlord will give
the tenant an improvement allowance in a
dollar amount, which typically forces
the tenant to deal with a Workletter.
Not only does it state what each party
is to pay, but also what happens if the
cost of the improvements exceed the
allowed amount provided by the landlord.
The (TI) allowance can be applied to
either useable square feet of the
premise or rentable square feet. The
rentable square feet is always larger,
usually 10% to 15% more, unless it is a
single tenant building, so the dollar
amount would be more. Make sure you
understand to which measurement the
allowance is being applied.
The Sublease Space Option
You’ve heard that you can get a really
good deal on sublease space. It is true,
but as with almost every benefit, there
are increased risks. Financial condition
of the sublease should be investigated
thoroughly. If they don’t pay the rent,
you suffer. If the sublease files
bankruptcy, your sublease is at risk.
You are stuck with whatever terms and
conditions negotiated by the sublease
with the landlord. There is usually no
tenant improvement allowance to make
changes. You will have to live with what
you get or dig into your own pocket.
What can you do to protect yourself? Ask
for some form of security from the
sublease. A letter of credit, for
example, that will provide funds for
increased rents or moving costs if the
tenant goes out of business. Once you've
negotiated a sublease deal, take it to
the landlord and try to convert it to a
direct lease. In any case make sure the
Landlord signs the sublease.
Don’t let your enthusiasm to make a deal
make you a bad negotiator.
It is easy to get wrapped up in a
negotiation and try to do anything to
make the deal. If a negotiation fails to
yield what you want, don’t look at it as
failure, but as part of the process of
getting what you want. Move on to the
next best alternative. Here is a link to
info on the office leasing process.
Separate the Business points from the
Legal Points
Clearly understand and have agreement on
the business points of the transaction
before delving into the legal points. It
will keep the negotiations clean and
clearly differentiate the stages of
negotiations.
Cost-pass-through cautions
If you are moving into a new or
partially occupied building add some
protection to the Cost-pass-through
provision that will require the landlord
to calculate your annual
cost-pass-through based upon a 90% or
95% occupied building. This will protect
you from moving into a building that
takes a long time to lease up. The
operating costs for a partially occupied
building are significantly less that for
a full one. Whether your lease calls for
an operating expense cost-pass-through
or expense stop, make sure you know your
starting point. Be aware of what
calculation method is normal in your
market. Depending on the market, your
cost pass through base year should be
either the current year or first year of
the lease. It can be either calendar or
fiscal. If your lease calls for an
expense stop in which you pay for any
expenses above a certain amount, get the
historical information to allow you to
make sure your expense stop is current
so you don’t get stuck with unexpected
costs.
The Most 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’s fun
reading, but rather to understand the
potential ramifications that could be
set in motion should some unfavorable
clause actually come into play. While
everyone always reads the summary page
and most read the next ten to fifteen
sections, only a few get through the dry
sections – sixteen to infinity. Very few
really read the Rules and Regulations.
After all, it’s mostly non-issues like
“Tenant may not have sales” or “Tenant
can't have pets.” Be careful, 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't. Seems
microwaves weren't invented when most
leases were first drafted. What are the
building hours? If it says 8 AM to 6 PM,
what happens if you want to come in
early or stay late?
Tenant Improvement allowance is often
applied to square feet
The (TI) allowance can be applied to
either useable square feet of the
premise or rentable square feet. The
rentable square feet is always larger,
usually 10% to 15% more, unless it is a
single tenant building, so the dollar
amount would be more. Make sure you
understand to which measurement the
allowance is being applied. The attached
link shows the generally accepted method
for measuring office space.
Office Rental Tips & Tactics
Helpful advice for making the most of this Guide- Get Professional Help...Finally, as mentioned in the beginning, as a tenant you rent office space only a few times in your corporate life, compared to landlords who rent space over and over again. Our final tip is to level the playing field by taking advantage of the availability of a good tenant representative on both relocations, renewals or subleases. They represent you and their services to you are almost always paid by the landlord. Doing so will save you both money and frustration over the long run, not to mention help you avoid making costly mistakes.
