You are the real estate decision maker for your company. At the end of the day, your employees, colleagues and superiors rely on you to provide sound guidance on how your company spends a significant portion of its monthly budget on real estate. There are some fundamentals to ensuring that you are mitigating your risk and maximizing your economic opportunity on your next lease or renewal. Here they are:
1. Make sure you are getting a fair market deal.
Whether you are set to execute a new lease, renew an existing lease or expand or downsize in your current property, you need to know if the economics you have discussed with the landlord (or even agreed to) are fair and reasonable based on the current commercial real estate marketplace in your area.
- Lease rate: Ensure that the rate and annual escalations you are about to obligate yourself to are in line with where the market is for comparable space in your geographic location.
- Landlord Concessions; Again make certain that you are receiving market amounts of abated rent and tenant improvement allowance (don’t think that just because you’re renewing your lease you don’t have the right to be represented and secondly don’t have a right to ask for some abated rent and new carpet or paint in your space)
2. Know (because you ask) about the financial condition of the landlord and the property you are about to lease.
Most landlords ask prospective tenants for multiple years of company financials to fully underwrite a tenant’s ability to perform on a lease. This is certainly fair and allows a landlord to make a sound decision when it comes time to spend money on TI’s and marketing commissions. Given that the tenant’s financial commitment in virtually all cases is more significant in terms of gross dollars committed than the landlord’s, the tenant should ask the question, “May I see your financials for this property Mr. Landlord? Please show me that you have $XXX to complete the tenant finish work you have committed to me. I would also like to get a letter from your lender acknowledging that your loan is performing.”
Don’t be afraid to ask. It is likely you are committing hundreds of thousands dollars (if not millions) over a period of 3, 5, even 10 years. You want to ensure that your landlord has the financial capability to perform with you and their lender.
3. Understand your useable and rentable square footage and the subsequent economic implications.
An often overlooked aspect of leasing commercial real estate is the fundamental issue of square footage. Ensure you understand the difference between useable and rentable square footage, the useable SF is the amount of footage between the walls of your space, the rentable square footage is that amount plus your pro-rata share of the common area in a multi-tenant building with a lobby, loading corridors etc…Your monthly rent is based upon the amount of square footage you lease. Thus, it is crucial to either measure the space yourself or have it verified by an independent third party (someone other than the Landlord). Assume you are leasing a 5,000 SF office space with a rental rate of $18.50/SF Full Service Gross with annual escalations. If your square footage is off by merely 90 SF it will cost you $8,775 over a 5 year lease. Don’t assume the square footage is accurate.
4. Review the building operating expenses and make sure you will not be overcharged.
Prior to executing a lease, ask the landlord or asset manager for 2-3 years of historical operating expense statements and the current year’s budget detailing a breakdown of the expenses. Take note of the controllable expenses (like common area maintenance and property management). Ask your real estate broker if these charges are in line with the current market. In many cases you can control your exposure for the lease term by asking the landlord for a cap on these controllable expenses. Again consult with your representative to ensure that you have language in the lease that protects you year-over-year and does not allow the landlord to arbitrarily increase costs in operating expenses that you did not budget for. Also ensure that you have ongoing audit rights to review the landlord’s bookkeeping so that you can monitor these costs throughout your lease term.
5. Hire a competent real estate attorney and review every clause in your lease.
Too many tenants give the benefit of the doubt to the landlord when it comes time to sign a 40- or 50-page lease document and commit to 5 years in a property and hundreds of thousands of dollars in lease value. Most leases are written to protect a landlord’s interest primarily (and understandably so) but this is why it is so crucial that you have an experienced real estate attorney review and provide comments on your lease agreement. Landlords anticipate tenant comments prior to lease signing and many of the clauses in the landlord’s lease can be tweaked or negotiated. Don’t hesitate to provide your comments to the landlord and negotiate at this point in the process, you will be glad you did so in the long run.
If you keep these five points in your pocket when it comes time to negotiate your next lease agreement, renewal or expansion you will be ahead of the game. These fundamentals allow you to take the necessary steps to ensure that you have secured a sound financial deal for your company and your interests are protected in the process.