Office space leasing can be a risky, time-consuming and complicated process
Here’s some of the most common office space leasing mistakes that tenants make:
Time Constrained – In any negotiation, time is the most valuable commodity. The most common mistake tenants make is underestimating the time it takes to properly conduct a property search, perform needed due diligence, negotiate business terms, draft and negotiate lease documentation and construct new office space. Generally, tenants should allot 6 to 12 months for office space leasing; however, the bigger the requirement, the more time that should be allotted. For tenants exploring a lease renewal, they must keep in mind their notice of renewal deadlines and adjust their due diligence period accordingly. Finally, tenants should also apply the same time frame to evaluating any early termination or contraction options they have, which may allow the tenant to renegotiate their lease to more favorable market terms.
Not assembling the right team – Office space leasing requires specialized expertise and a high level of market knowledge, which many tenants do not possess, but which landlords and their brokers do, given it’s their core business. To level the playing field, tenants are well advised to assemble a team compromised of at least a qualified tenant representation advisor, and even a project manager, and architectural team for larger projects. The tenant representation advisor can serve as “quarterback” for each of these team members and provide the tenant with a single point of contact.
Lack of Internal Consensus and Focus – As a real estate decision affects multiple stakeholders in an organization, its important to develop consensus on the objectives and key drivers among the company’s stakeholders. An internal single-point of contact should be appointed to maintain a clear line of communication with the team, and develop a real estate strategy aligned with all stakeholders.
Not defining space needs – Given changes in technology, many companies today are able to effectively use a lot less space than a few years ago. Before embarking on a search for space, tenants should work with an architect or tenant representation advisor to develop a space program which will forecast current and future office space leasing needs.
Lack of flexibility – Given the rapid change in business today and long-term nature of most office leases, tenants need flexibility to align their office space to their business needs. Early in negotiations, tenants should look to maximize flexibility with rights to contract, expand, terminate, extend and sublease excess space as needed. While such rights are an uphill climb with most landlords (and their lenders), savvy tenants gain the most by pre-negotiating these flexibility rights while competing landlords are trying to land the deal.
Not independently verifying building condition and infrastructure. This is particularly important when tenants are exploring older office buildings where the mechanical infrastructure might be inadequate for certain tenants. Proper due diligence helps avoid future surprises.
Not considering all occupancy costs – A tenant’s occupancy costs go beyond the base rent. A major component of office space leasing is the treatment of “Operating Expenses” and “Taxes”. If not carefully negotiated, landlords may have a lot of latitude on what they charge a tenant as an “Operating Expense” or “Taxes”. There may be unexpected costs buried in the definitions which can play havoc with the tenant’s budget. A well advised tenant will have a laundry list of exclusions to what is an “Operating Expense” and “Taxes” and will also have an annual cap on increases in such charges. They should also have the right to audit such charges.
Lack of Competition – Tenants must engage multiple landlords to compete for the tenant’s business. This is particularly crucial when a tenant is exploring renewal versus relocation. Only by creating competition for it’s tenancy, will a tenant obtain the most favorable lease terms.
Inadequate attention to Tenant Improvement Process and Lease Language – Many tenants underestimate the complexity and cost of an office build-out. Its not uncommon for the interior construction to exceed $50 per square foot for an average office space build-out. Higher-end construction can approach and exceed $80-$100 per square foot. With this much money at stake and the operational importance to the tenant’s business, tenants must carefully perform their office space leasing due diligence of space planning and construction pricing to avoid any surprises. Of equal importance, tenants must negotiate the lease construction language (i.e., “Work Letter”) to clearly allocate responsibility between tenant and landlord and make clear the landlord’s obligations. In particular, hidden fees and costs should be negotiated and responsibility for delays and costs overruns clearly allocated.
If you need help with the office space leasing process, or if you just need some advice or have questions, we can help.
Check out our no-cost Tenant Representation services for further information.