When it comes to leasing office space many companies make a lot of mistakes, and in business mistakes equal to dollars. Below are 9 common mistakes that companies make when leasing office space and a few suggestions on how to avoid them.
1. Know what you need.
Are the spaces you are considering large enough to meet the needs of your company, employees and clients? Are they too large to be practical for your requirements, or too small to accommodate your equipment, personnel and other business-specific essentials? Many prospective tenants wind up settling for a smaller space in the “right” part of town, or paying for far more space than is really necessary. You can dodge this trap by consulting with an architect for a space program, which analyzes the current and future space needs of your business and produces a snapshot of business’s needs. If you have a lot of heavy equipment, you may need reinforced floors. Additionally, special telecommunications and electrical needs, if applicable, should be considered when envisioning your perfect space.
2. Have someone represent your interests as a tenant.
Retaining a commercial real estate agent that only represents office tenants, an attorney, or ideally both whose sole interest lies in servicing your interests is a key step many potential tenants overlook. This step can help you locate properties that meet your needs, give you more flexibility and negotiating power with regards to terms and monthly cost of the lease and prevent potential legal pitfalls. An attorney specializing in the area of commercial real estate is important, because merely having any attorney may not be sufficient to protect your interests from unscrupulous or dishonest landlords.
3. Read everything.
Every piece of paperwork, no matter how trivial or “standard” it may seem, should be inspected minutely. Leases are designed to protect and serve the landlord, not the tenant. In addition, the leasing documents are intended to aid the landlord in generating the maximum revenue possible within legal bounds. Make sure you read your existing lease so you know the move out procedures AND that you review the new lease for anything that could financially impact your business. All zoning and ownership paperwork should be examined carefully, to ensure that the space you are leasing is appropriate for the work your company is doing. Finally, all HVAC systems and auxiliary electrical systems should be checked for occupancy readiness and code compliance. Many tenants fail to do their due diligence in this aspect, leaving the landlord room later to blame the tenant and pass on the cost of repairs that are not properly the tenant’s responsibility.
4. Learn the market
Landlords lease properties to generate income, and may set their rental rates and other charges higher than the area or neighborhood average. A real estate broker or some personal research time can help you determine what the median rents and security deposits are in a given area. It’s important to compare different office buildings based on monetary and non-monetary criteria before entering negotiations with landlords. A landlord who is eager to rent offers more leverage and negotiating power concerning reduced deposits and rent to tenants, but many tenants ignore this key fact of property rental.
5. Security Deposits
The landlord will want some sort of security deposit and the amount will depend on a number of factors such as the landlords perception of your financial strength, lease term, lease rate, tenant improvements, etc. Security deposits can be in the form of cash, check, or letter of credit (LOC). In some markets or larger deal size landlords may prefer a LOC from a bank as opposed to cash or check. The main reason for this is because if a tenant goes bankrupt a security deposit in the form of cash or check could get tied up within the legal system or other creditors, while a LOC would remain with the landlord.
6. Understand the terms of the lease.
This comes back to reading all the paperwork carefully. Can your landlord order you to relocate to another floor or building, and what are the notice parameters? Can you reasonably comply with those parameters? Are the terms fair and reasonable to all parties? What do the notice terms say about you relocating or exiting the lease? This seemingly common-sense point can become a major and expensive stumbling block later if not dealt with properly at the outset.
7. Know how much leverage you have.
Many tenants do not realize that before the lease is signed, they have an immense amount of bargaining power, particularly in areas where the rental market remains depressed. Even small business owners who muster a company of less than ten employees can negotiate a more advantageous lease agreement, so long as it is done before the final lease is ratified. Understanding the power of being in a position to walk away from an unfavorable lease arrangement is key to negotiating a more advantageous position and saving money in the long term.
8. Make sure your broker is independent.
Most landlords prefer to work with brokers who represent both tenants and property owners and/or managers, which generally means larger firms. This arrangement only benefits the landlord, because in such situations the broker will generally favor the landlord’s interests over yours. Therefore, bigger is not always better. A smaller firm that can offer you more individualized service and does not represent landlords, or at least your landlord, is another bargaining chip you can bring to the table to slant the odds in your favor.
9. Leave ample time for everything.
Many companies underestimate the time it takes to find and lease office space. Depending on how much space you need and how tight an office market is it could easily take you 6-12 months to find and negotiate suitable space. If you are a large company this could take longer. Even small firms may need six months to a year to find an adequate space, negotiate a reasonable lease and implement the move.
Additionally, some landlords require letters of credit, also called LOCs, from a bank in lieu of cash for a deposit. This protects the landlord in the event your business goes bankrupt, although local and state laws may vary regarding whether this is viable or legal in your jurisdiction. LOCs may take up to a month to process, depending upon your bank and relevant laws. Allowing sufficient time to move and to assess all the necessary paperwork can reduce stress, make for a smoother and more efficient move and avoid expensive oversights later.
By keeping these common mistakes in the forefront of your mind during the leasing process, you can reduce expenses and the hassles associated with starting up or expanding your business. Having a reputable broker on your side is another way you can navigate these issues effectively, leaving you more time to focus on driving your business and alleviating the extra pressure of lease negotiation with landlords and other interested parties.