6 Things To Know Before Signing an Office Lease
“We always have enough time if we will but use it right.” -JOHANN WOLFGANG VON GOETH
Before you commit your hard earned dollars to monthly rental payments, consider these 6 issues. Effective consideration of these important areas can make your Lease payments work much harder for you.
1. You can and should, allow enough time.
Allowing yourself enough time is easy, and can give you complete peace of mind when shopping for your new location or renewing your Lease. There is no cost to you in starting early and this gives you the benefits of time leverage in a negotiation.
Many Landlords are canny enough to use time pressure against you, holding out until the last moment to resolve elements of the negotiation that could have been resolved much earlier. They use time pressure to close the deal in their favor. Depending on the size of your tenancy a new premises search should start at least six months prior to commencing business while a Lease renewal should be started at least 9-12 months prior to Lease expiry. Large Tenants should start up to 2 years ahead of time.
Remember that any leasehold build-outs always take longer than expected and that Landlords tend to drag out Lease negotiations to prevent you from finding an alternate location and increase the pressure on you to concede important points that end up putting more of your money in their pockets.
2. Know what monthly dollar amount you feel comfortable committing to.
Always pre-assess for yourself what monthly dollar amount you feel comfortable committing to. Do not let availability of space dictate your monthly rental payment. Taking too little or too much space even if it has a lower cost per square foot is not an optimal solution.
3. You should be thinking about your long term goals, and expected situation, to determine the type of Lease that will best suit your needs
There are a number of questions you should be asking yourself before you commit to a Lease. Is your income expected to change (up or down) in the near term, impacting how much money you can afford to pay to your Landlord? Will you need more or less space during the Lease term?
The answers to these and other questions will help you determine the most appropriate Lease term you should be seeking and the flexibility that you build into the Lease term.
Don’t be talked into a longer Lease than you might be able to negotiate and be aware that there are clauses that can be negotiated into a commercial Lease that can provide flexibility and protection against potential changes in your business or the business climate in general.
For example, you may want to consider the viability of “kick out clauses” that provide for you to terminate your Lease before the end of your Lease term if your business grows or declines and the Landlord cannot or will not accommodate you.
4. Make sure you understand the differences between rentable and usable space and what standards the Landlord is using to calculate the square footage.
Make sure that you know ahead of time how much the gross up factor is for your space. Rentable space that you actually pay rent on can be up to 20% higher than the actual area you occupy. These two calculations can cost you thousands of dollars in rent so make sure you find out and ask the proper questions.
The standard of measurement should be stated in the Lease and provisions made to ensure that a calculation of measurement is provided to you by an architect or other measurement professional before the Lease term commences.
Improper Lease clauses regarding measurement can cost you money and sometimes Landlords insert clauses that allow them to increase your rentable area in the middle of the Lease term when measurement standards change. Well drafted Leases will enable you to avoid these unfair increases.
5. Always negotiate for more than you think you can get
Landlords typically quote rental rates higher than they think they can get. Don’t overbid by not being aware of rental rates in your area. One of the cardinal rules of canny negotiating is to ask for more than you expect to get.
You can always go up in negotiations from your starting point but you can never go down. Your initial proposal should be an equal distance on the other side of your objective as their proposal. If the Landlord offers $15 a foot and you want to pay $13 then make an opening offer of $11.
Assume that you’ll end up in the middle. You will be amazed at how often it happens. Don’t forget to calculate in any allowances and free rental periods and remember that there are innovative ways of increasing allowances and free rental periods by giving the Landlord what he wants while getting what you need as a Tenant. A savvy leasing professional can slice the salami in a many different ways.
6. Limit Operating Cost Increases
Landlords provide operating cost and tax estimates for the current year to the Tenant in the Lease proposal. In one case, a Tenant faced operating costs and taxes 50% higher than the Landlord’s original estimates. He took his case to court and lost.
Make sure the wording in your Offer to Lease allows you to recoup this kind of loss in court if necessary.
Try to control operating cost increases. It’s a good idea to cap future operating cost increases as operating costs have a tendency to grow faster than you’d like which can mean huge operating cost increases.