The success or failure of office lease negotiations could mean success or failure of your small business. To better understand the essentials, here are 10 of the most important office leasing terms.
1. EXCLUSIVE BROKER – This “label” is deceiving! In real estate terms the “exclusive” broker solely represents the landlord’s interests and thereby obligated to extract money from you. Only use real estate broker-consultants who represent your interests, not the landlord’s.
2. BASE RENT/ADDITIONAL RENT – “Base rent” is just one ingredient baked into your cost of occupancy. The building’s loss factor; operating expenses; work letter contributions, etc.…all contribute to the true cost of occupancy. “Additional rent” includes periodic escalations of operating, property taxes, utility expenses, etc. When negotiating, push the base years into the future and lower percentage increases to avoid the cumulative-compounding effects.
3. CONCESSIONS – Free rent comes in various forms, including rent for any remaining term at the premises you leave, which your “new” landlord may assume.
4. WORK LETTER – Specify the “quantity” and “quality” of materials used to build your suite. If the cost of construction exceeds the landlord’s budget, you will be responsible to reimburse the additional expense. Lastly, avoid having the lease commence until work is complete and fulfills all building codes.
5. SUBLEASE/ASSIGNMENT – Shifting business conditions could leave you with too little or too much office space. The sublease/assignment clause helps solve the problem, but landlords try imposing many restrictions. Don’t overlook this clause when negotiating.
6. SECURITY DEPOSIT – Security deposits come in different shapes and sizes. Letters of credit can be used as a substitute for cash deposits, whereas limited personal and/or “good guy” guarantees compel principals to assume responsibility if the tenant defaults.
7. OVERAGE UTILITIES – You will pay for every hour exceeding the number of hours per week for lighting and HVAC allocated by your landlord. Keeping cool and the lights on after normal business hours can be expensive if this topic is not addressed.
8. COMPLIANCE – Agreeing to abide by all “legal regulations” seems harmless, but this clause cleverly shifts responsibility onto the tenant when complying with compulsory government alterations. If you are required to modify or install sprinkler or fire alarm systems it could cost tens of thousands of dollars!
9. RENEWAL/EXTENSION OPTION – The extension option sets your future rent at either the current lease schedule or a derivative of “market” rent. It also protects you from another tenant desiring your suite. Options are not transferable to subtenants or assignee’s.
10. SURRENDER/RESTORATION/HOLDOVER – Most landlords require the premises returned to the “original condition,” but some require reversion to “raw” space, leaving you with demolition expenses. Incorporated in this clause is the “hold over” provision, which increases your monthly rent by 2 to 3 times if you don’t vacate by the lease expiration date.
Final Thoughts – If an office lease is not expertly negotiated, it can present an existential threat to your business. Reach out to experts who have the experience and skills to assist you. Otherwise, you risk being visited by a black swan.
© 2016 by The Navigator Consulting Group, Ltd.
About the Author…
The Navigator Consulting Group is a commercial real estate consultancy-brokerage, specializing in office tenant representation. Mr. DiDonato, president, may be contacted at 516.605.2220 or firstname.lastname@example.org