Looking For Office Space: My Initial Offer and Negotiation

I had chosen my desired office. It’s a pretty weird to imagine that this one decision may affect the rest of my life. You and I have all gone through these key moments, but it’s still always a bit nerve-wracking whenever these situations present themselves.

I’ve learned that bidding for property is very similar to dating. You’re attracted to various spaces, but you sometimes get lucky enough to run into what you think is the ONE. You really don’t know exactly why you gravitate toward this one office, but you are. As you learn more about the property, you look for reasons to justify this attraction. However, the further you delve into this space, you actually discover little imperfections that make you question your decision. Nevertheless, you push forward.  Unfortunately, just because you’re interested in a space doesn’t mean that the space will have an equal interest in you. You do this back and forth dance trying to find a happy medium where both parties’ wants are as closely satisfied as possible. Sometimes, a mutual agreement can’t be reached.  You part ways and try to move on. Other times, you are a match made in heaven, and you get married.  Trust me, there’s also just as much drama as well.  Thankfully, you will have a leasing agent that can act as an intermediary to soften the “he said, she said.”

I was going to put in an offer for approximately 1,900 sf out of the 2,650. I knew exactly where I wanted to split the space. The owner would then have 750 sf of space left, including a bathroom. I didn’t think it wouldn’t be too hard to rent the remaining space out, and hoped that the landlord would see things my way.

Before I put in an offer for this property, I needed to know approximately how much the tenant improvement costs would be. My leasing agent arranged two separate contractors to provide me with an estimate. I met with each of them and told them what my wants and needs were. For this space, I wanted to convert a few big rooms into many small rooms, add plumbing to these rooms, and change the flooring.  This wasn’t going to be a complete demolish and build from ground up project. I was told that adding plumbing would be the largest cost, which lead me to ultimately decide putting plumbing in only 3 out of 5 rooms. Ideally, I wanted a sink in each exam room, but as an ophthalmologist, I’d probably end up using it to only wash my hands anyway.  You should, however, find out if your city requires all medical offices to be equipped with sinks as a building code. I hear that some places do. My leasing agent knew of no such law.

Each contractor came by, talked to me, and took some notes. They got back to me within 3 or 4 days. Both of them came in pretty close to each other at approximately $23/sf in buildout costs. Although I had the budget to shell out the entire cost, I still wanted the landlord to contribute some, if not most of the costs.

With this knowledge in hand, I had my agent offer a 5 year lease for 1,900 sf at $2.10/sf, with the landlord contributing the entire cost of tenant improvements, and also giving 3 months of free rent. I knew there was no way in hell that he would agree to these terms, but this would be an opportunity to feel the landlord out. Remember, the landlord was a single owner physician, who probably wasn’t too interested in forking over large cash amounts upfront. In reality, I was hoping that he would come back with 60-70% of the tenant improvement costs and 2 months rent.  I was sooo wrong.

This guy came back with the most unreasonable offer ever. He didn’t budge a single bit.  He wanted me to rent the entire 2,650 sf at $2.10/sf. He offered to put in $0.00 toward  tenant improvements. He didn’t even want to put in any money for the signage! Oh yeah, and he wanted 2 to 3 months rent for the security deposit. He did offer me 2 months free rent though. The counteroffer was nowhere near what I had expected.

What I found out around that time was that there was another potential suitor, an MRI group, who was interested in renting out the entire space. Although the real estate market is currently very weak, this space all of a suddent became a seller’s market. The fact that this property had been on the market for less than a month didn’t help either. If the landlord had put up this space a year ago with no bidders, he would’ve been more desparate, and would have had pared expectations. However, this guy had two bidders within a month of listing, so I could see why he thought he could be so inflexible.

My counter-counteroffer was 1,900 sf at $2.10/sf, 2 months free rent, and 50% of the tenant improvement costs, and I would either pay the rest up front or I would amortize the remaing amount into a higher rent, with interest factored in. I also considered taking the entire 2,650 sf if the landlord agreed to front the entire tenant improvement costs. I could sublease any unused space and recuperate some of the rent costs. My leasing agent advised against it because there are so many other options available in this bad rental market, and also because I shouldn’t take more of my focus away from the practice itself than I needed to do so.  She was right.

In the end, the owner went with the MRI group. He didn’t completely blow me off though. It sounds like he gave me some consideration because he requested another counter offer when I went silent. My guess is that the MRI group also asked for improvements, and that their improvements were larger. However,he probably ended up choosing them instead of me because they took out the entire 2,650 sf and weren’t a startup.

Back to square one.  Time for a new search.  This first round took about 5 or 6 weeks.  It was unfortunate that I couldn’t secure this space because much of my paperwork was going to be delayed as well now.

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