The Search for New Office Space: Time and Planning are Key
by Bill Gladstone


Finding new office space that will accommodate your long-term objectives does not have to be difficult or stressful. Usually, the stress and difficulty arise when there is not enough time to go through the lease process at a comfortable pace. Allowing 6-8 months should be ample time unless you have some very unique requirements.  

Know Your Current Lease  

You must always stay familiar with the terms of your current lease. For example, if you have a notice provision that requires you to tell the landlord 180 days (6 months) before the end of the current term that your are going to exercise your option, it is too far in advance to know the alternative options you will have when your lease is up. Any of the alternative spaces could easily be leased to another tenant within that 6-8 months, but this is about the time you must begin your search.  

If you miss notifying your landlord prior to the notice date, it doesn’t mean you can’t renew your lease. However, your landlord is not bound to the terms and conditions that were already negotiated. If it is a landlord’s market (more tenants than space), you might have to pay a higher rent.  

Perhaps you can renegotiate with your landlord to only give 90-120 days notice. Then you’d have time to explore the market before the notice date arrives. You could have a good handle on what office space alternatives you will have before your lease is up.  

One client missed their notice date. It was a year in advance and if they did not notify the landlord, it automatically renewed for another three years! WOW! They had closed this operation down, moved to another state and continued to pay $119,000 per year for vacant space. It’s probably in your best interest to make sure your lease is not automatically renewing.  

What happens if you find space elsewhere, choose not to exercise your option, but for one reason or another you are still in your current space when your lease is up? There is usually a holdover clause in your lease, (i.e., you are now on a month-to-month HOLDOVER) with 30 days notice by either party. You might have to vacate the space. The HOLDOVER clause in your lease typically addresses how much more rent you will have to pay. I have seen the rent stay the same, or increase by 10%, 25%, 50% or 100%. I have seen a few leases that allow for the landlord to establish the new month-to-month rent at his/her discretion. Know what your holdover rent is and plan for it.  

Finding the Right Site  

Once you start the tours of possible alternative sites, count the parking spaces in the parking lot (off street parking.) Buildings used to be designed for 4 spaces per 1,000 SF of building. The current trend in office space is fewer private offices, allowing for more people in the same amount of square footage. Thus 4 parking spaces per 1,000 SF is no longer sufficient. You need 5-6 parking spaces per 1,000 SF of your office area.  

Most multi-tenanted buildings have COMMON AREAS. This is the amount of square footage that makes up the hallways, the public bathroom, the foyer, etc. It does not include vertical penetrations such as elevators and stair towers. Typically in our market, the common area is about 10-12% square feet additional to what you occupy within the four walls of your space. Thus your RENTABLE square feet is larger than your usable square feet (by 10-12 %.) Check out common areas as you walk in to see the space itself. And understand that 2,000 SF rentable, may only be 1,760 SF usable (if the common factor is 12 %.) You still pay the same overall rate in this 2,000 SF It is just not part of the usable square footage within your four walls.  

Negotiating Rent  

When negotiating lease rates, 3%-4% annual escalators are currently prevalent. Sometimes landlords will allow for no escalations until the third year (of a five-year lease), or some other variation where your rent stays flat for a period of time. A lot will depend on the term of your lease.  

Within your lease rate, whether it is new or existing space, a BUILD-OUT ALLOWANCE is factored in for the carpet, paint, upgrades, interior partitions, doors, and electrical you will need in your space. If you can move right into the space with very little modification, perhaps you can negotiate your build-out allowance out of the rate.  

On the other hand, if you require a lot of new walls, upgraded carpets, ceiling tile, textured wall coverings (instead of paint), etc., you may not have enough money in your allowance to do your build-out. In that case, you may have to pay for the extra costs up- front or the landlord may allow you to amortize it over your initial lease term by adding it to your lease rate. This is why it is very difficult to get a market rental rate with a 3-year lease if you have even a modest amount of build-out. A three- year allowance is not enough to get your work finished. The extra build-out dollars added to the lease rate will push the overall rate higher than market.  

Typically on new space you can expect a build-out allowance of $2.20-$2.50/SF per lease year (5 yr. initial term=$11-$12.50/SF below the ceiling). That means this allowance starts after the lights, heat and AC, ceiling and perimeter walls are in place. Everything else comes out of the allowance. A 3- year initial term would be $6.60-$7.50/sq.ft. If the space already exists (second generation space), I have typically seen $1.00-$1.35/SF per lease year for the build-out allowance. Again, this is still considered “below the ceiling” since the carpet, interior walls, upgrades, etc., may have to be changed or renovated. You should know what your allowance is, going into any deal.  

It’s amazing to me how many tenants will argue over $.10-$.25/sq.ft. in rent and never take the time to measure the space. One group negotiated twentyfive cents off the lease rate and managed to save $7,000 a year in rent. Unfortunately, they are paying on more square feet then they actually have and even with the savings, the “phantom space” costs them $8,000/year!  

Types of Rent  

If your rent is a GROSS RENT (i.e., everything included even janitorial), make sure you ask if the janitorial service is 5 days per week. Sometimes the landlord may only be planning for 2-3 days per week. One landlord does not consider janitorial as part of the gross rent. If you did not know that, it could deplete your budget by another $.80-$1.00/SF for 5 days per week cleaning services. Also, find out about expense amounts (called EXPENSE STOPS) the landlord has budgeted for in your gross lease. Anything over the expense stop will have to be paid by you in addition to the gross rent. Make sure the expense stops are realistic. Compare them to what you have in you current situation.  

If you have a NET LEASE (where you pay the actual amounts for the expenses separate from the base rent) ask for a building history so you can see what they are. If the building is brand new and has no history, ask the landlord for the building’s expense proforma.  

Moving Into Your New Space  

Your OCCUPANCY DATE (the date you move in) does not have to be the date you start paying rent (RENT COMMENCEMENT.) Many times your landlord will give you time to move in, set up and get comfortable before rent commences. In a landlord’s market, I’ve found it to be about one to two weeks. When it is a tenant’s market (a lot of space available) it is sometimes stretched in excess of 30-45 days. If you are leasing 3,000 SF at $9.00/ SF net the first year your rent is $27,000. If you get a month between the occupancy date and the rent commencement date that comes to a savings of $2,250, or your overall effective rate now equals $8.25/sq.ft.  

These are some terms you should remember when negotiating a lease. You may also want to consider working with a qualified real estate broker and real estate attorney. Both should be skilled in the leasing of office space.  

The broker needs to show you the market and help you compare your alternatives. The broker should be able to help you with a locational analysis as well as a “present value” financial analysis that includes all dollars spent (moving costs, telephone installation, the effect on escalations of rent in future years, etc.) in leasing any of the short listed properties. At that point, you will know your best location and your best financial models.  

The attorney is necessary to protect your rights in the lease (default provisions, non-disturbance, etc.) Using a qualified team that understands your objectives will save you time and money and eliminate a lot of stress from your life.

Copyright 2005 BillGladsone.com. All Rights Reserved.

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