Commercial Real Estate Terminology, Part 2

When I started to look for office space, I had a minimum level of commercial real estate knowledge.

The first thing you have to know is that EVERYTHING IS NEGOTIABLE!!! There is no such thing as a “standard” lease or “standard” terms. The rent is only one part of the lease that you can negotiate.  There are so many other terms that you can work out. Sometimes, it’s even better to take the rent at asking price, and negotiate for other terms in your favor.

In addition to the monthly rent and the rent structure, here are a few other things to look out for.

1. Rentable vs. Usable Square Feet

You have to find out if the listed square footage is the actual usable square footage or if it also includes the common area load. The common area load usually accounts for 8-12% of the rentable square footage, with the remaining being the actual square footage of your premises.

2. Term

Most leases will be 5 years long. However, they can be as short as 3 years or as long as 7 years. Obviously, the longer the lease term, the more negotiating power you will have with other terms of the lease. Remember, if you sign a lease, you are committing to pay rent for the entire term of the lease. Some landlords will require a personal guarantee, that will allow them to go after your personal assets if you default on your montly rent payments. So, signing a lease is a HUGE commitment. However, you can negotiate certain exit contingencies involving penalites, or you can request the right to sublease the space and collect rent from a third party until the lease expires.

3. Tenant Improvements

Rarely, does an office space fit your needs as is. Expect to perform some sort of renovation to your space. Some spaces will be an empty shell requiring complete buildout, whereas other spaces will just require changing the carpet and painting the walls. Regardless, most properties won’t make you responsible for the entire cost of improvements.  The landlord should be expected to contribute a portion, of which you can negotiate how much. Simple improvements can cost $15-20/sf, and complete buildouts can cost $100+/sf.  If your space needs minimal leasehold improvements, you may be able to negotiate a lower rent.  If your space needs a huge injection of cash to make it into what you need, then you can try to amortize the improvement costs into a higher monthly rent. You get the idea. Most of the time, the landlord will contribute a percentage, and you will contribute the rest.

4. Rent Commencement

Another area you can negotiate is free rent. Usually, you can get anywhere between 0 and 3 months free. Of course, if the market is dead, you could probably stretch it out further. Also, make sure to request that rent begins after a reasonable construction period. You don’t want to be paying rent while your space is still under construction.  You probably also want to have access to the address and the mailbox as soon as you sign your lease, so that you can apply for hospital privileges, insurance carriers, business license, etc.

5. Rent Increase

Rent will increase each year. Usually, rent will increase 3-5% annually. Sometimes, the rent increase will follow the Consumer Price Index. If that’s the case, make sure you ask for a cap on the rent increase.

6. Security Deposit

Landlords will usually want a larger security deposit if you’re a startup. Otherwise, the standard is one month’s rent. Try to convince the landlord to keep the deposit at one month’s rent. You don’t want to tie up more capital to the security deposit than necessary.

7. Signage

There are various forms of signage. You can have a huge blinking neon sign on the top of the building, or you may just have your name on a small directory next to the elevator. Regardless, try to see if the landlord can provide for some or all of the costs of erecting your practice’s presence in the building.

I think these are the main things that you want to look out for when negotiating a lease. Again, remember that EVERYTHING IS NEGOTIABLE!  You will be able to negotiate pretty much anything else in your lease in addition to the terms above. At the least, it doesn’t hurt to ask. Most of the time, you will go through your leasing agent to deliver your terms, so you won’t have to worry as much about offending the landlord or starting off on the wrong foot. You should probably bring up these terms when you are ready to make an offer, and not when your touring the premises with the landlord. Your leasing agent will be able to make recommendations on what terms are fair.

Your negotiating power will depend on the market conditions. In 2010’s renters market, you will most likely be able to secure favorable terms. If a space has been on the market for 1 year, if there is a low occupancy rate in a building, or if there are 50 other similar spaces in the area, you should have the upper hand. However, if you will be competing for an office space with another potential renter, you will have to be willing to sacrifice certain terms if you really want to nab that space.

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