Doing a commercial real estate deal can be a daunting process with many pitfalls.  The selection of a broker is one of the most important aspects of the task.  The landlords are experts at making tenants believe they all have great relationships and have their best interests at heart.  But the opposite is true.  Landlords do real estate transactions 24/7 and the average company owner does it once every five to ten years…the landlords are holding all the cards.  The company owner needs help and that help will be a good broker.  

Landlords typically craft leases which are long with ambiguous wording meant to cause confusion.   The details in the leases can cause the costs to escalate very rapidly and restrict the company’s ability to be flexible.  Selecting the right broker is key to the company protecting itself for the long term…and leases generally last 5 to10 years or more. 

Brokers that specialize in representing companies are called tenant representatives, which are similar to a residential buyer’s broker. The tenant rep broker should guide the company through the process by learning and understanding the company’s goals and then create the best market based scenario to achieve those goals.  Selecting a broker should be based on their experience, (ten years minimum), as well as their recommendations and testimonials.  Beware the broker from the large full service firm.  These brokers most often seek landlord agencies which create a conflict of interest with the company. The experienced tenant rep broker will seek to level the playing field between the company and the landlords, with the goal of leaving nothing on the table.

When preparing for your lease expiration, think about the amount of time needed for the process. Counting backwards, it usually takes the landlord three months to get the permits and build out the space based on the agreed upon floor plan. Allow one month for the lawyers to negotiate the lease and three to six months to research your options, negotiate the terms of the deal, and design your space. The whole process should take about 8-12 months if you are between 5,000-10,000 square feet and a year or more if you are over 10,000 square feet. If the tenant allows the proper amount of time, the tenant will have negotiating leverage, which I call “positive time”. If too short an amount of time is allowed, the landlord will have leverage, which I call “negative time”. You don’t want to be caught in negative time.
Next, the corporation’s most recent two-year financial statements should be prepared and ready for submission to the landlord. Landlord’s want to know who you are and what you want. Who you are is determined by your financials. If the financials are good to excellent, they should be shown to the landlord in the beginning of the negotiations; they will create leverage. If the financials are poor, they should be shown after the business terms have been negotiated. The landlord will not negotiate the security until he sees the financials. If the financials are weak, he will ask for a larger cash security, letter of credit or personal guarantee.
If the landlord is nervous about the company’s financial ability to fulfill the lease terms they will look for their upfront expenses secured. These expenses include the cost of the work to build out the space, the commission, and the concession. Benchmark numbers for the work letter are $20 per square foot, commission is $1.00 per square foot and the concession is determined by the amount of free rent. The total security can burn off over the term of the lease. For example, a 10-year lease will burn off at a rate of 10% per year. In short, make sure enough time is allowed and the company’s financials are in order to maintain leverage when negotiating.

There are a few items to consider regarding an office lease, especially if that lease will expire within the next 18 months to two years. The first thing to consider is your company’s needs. Since office leases typically span five to ten years, a company needs to consider its present as well as its future needs. That being said, think about what’s happening with your company and your industry. Is it doing well and growing? Or is it contracting and downsizing. Will the future bring hiring or layoffs? The answers have to be added to the present employees to determine the necessary square footage. Allow 200-250 square feet of office space per person. This will also accommodate the reception, conference, kitchen, storage areas as well as the circulation.
Next, think of the type of building that is important to you and your company. There are three different types of buildings; the first and most expensive is an “A” building. These are generally newer with excellent locations and amenities, including a café, under building parking, health club or gym, conference room, concierge, large atrium, artwork, etc. The “A” building is desirable if you are a large company in need of an image and/or need to attract high quality employees. Next is the “B” building, which costs less and offers some of the above amenities such as a café and under building parking. Last is the “C” building, which is much less expensive and is typically used for back office space. The C building offers no amenities and the location may also be off the beaten path.
Now consider the location of the building. The primary factors to consider are where do your employees and your management live? Do you need access to a major highway, train station or airports? Are bus routes or subway stops important criteria? If you have out of state visitors, is a hotel readily available?
Remember to always think ahead and consider your current state with regard to your future needs.