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Entries Tagged as 'Office Space Negotiations'

Rent or Own Office Space? How To Decide

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From NFIB - the Vocie of small business
One of the toughest decisions for an independent business is whether to lease or buy office space. "You have to do a thorough financial analysis, taking present values into account and the cost differentials [between leasing and buying]," says Jim Osgood, whose company, OfficeFinder LLC, is a web-based office space referral and information network.

Owners should think about cash flow, future expenses, management costs and more. To help make an educated choice on which path is best, consider these pros and cons of leasing versus buying office space.

Leasing Advantages:

  • Leasing requires a smaller up-front cash outlay—typically the first and last months' rent—and  frees up working capital.
  • Renting provides flexibility: If your company is growing, leasing puts fewer constraints on the firm.
  • Monthly lease payments are typically fully tax-deductible as a business expense.
  • Renting in a high-image area is usually more affordable than buying in a prime location.
  • Owners are free to run their businesses rather than manage properties.
  • There's a short lead-time to move in.
  • Maintenance, repairs and modifications are often negotiable with landlords.

Leasing Disadvantages:

  • Costs are variable: The market dictates what you'll pay for rent over time.
  • Rental properties do no accrue equity value.
  • Landlords may limit expansions and modifications.

Buying Advantages:

  • Well-selected properties should appreciate in value over time, allowing owners to sell out and fund their retirements.
  • Costs are predictable, particularly with a long-term, fixed-rate mortgage.
  • Businesses can take depreciation on the improvement portions of their property.
  • Companies can usually deduct interest payments on their tax filings.
  • Owners can rent out extra office space as an added source of income.
  • Businesses can make changes or additions to the property without obtaining permission, if zoning ordinances permit.

Buying Disadvantages:

  • The outlay of cash is significant, with down payments ranging from 10 to 25% of the total price. Would your return on that money be greater if you invested it back into the business or made other investments?
  • There may be a long lead-time to take possession because of real estate closing procedures.
  • Managing office space is time-consuming. Owners are responsible for all maintenance and repairs.
  • If the property becomes inadequate because of growth or other factors, the company may be forced to sell.
  • If cash flow becomes a priority, it may take a while to sell the property.
Buying Office Space , Office Space , Office Space Negotiations

Consumer Confidence Up Sharply Again!

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The Conference Board Consumer Confidence Index showed a sharp increase in May for the second straight month. The Index now stands at 54.9 (1985=100), up from 40.8 in April.   The Consumer Confidence Survey is based on a representative sample of 5,000 U.S. households. The monthly survey is conducted for The Conference Board by TNS. TNS is the world's largest custom research company.

The employment outlook was also less pessimistic. The percentage of consumers expecting more jobs in the months ahead increased to 20.0 percent from 14.2 percent, while those anticipating fewer jobs decreased to 25.2 percent from 32.5 percent. article

Along with this news, the National Association for Business Economics realeased a report that over 90 percent of economists predict the recession will end this year, although the recovery is likely to be bumpy. article

Economists advising the American Bankers Association said on Tuesday that the U.S. recession will end in the third quarter. But they warned that lingering high unemployment and large federal deficits may pose a longer-term threat. article

All in all, prettty good news and encouraging when it comes to small businesses making decisions related to their office space needs.


Office Rental , Office Space , Office Space Negotiations

How long of an office lease should I sign?

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It all depends on your business and your office market.  Obviously now with it being an office tenant's market, the longer you lock in lower rents the better.  However, if rents increase upon a recovery and it becomes a landlord's market you will be faced with increases upon renewal or expiration; which emphasizes the need for regular review of you lease vs the market.  You may want to negotiate a stabilized rent in year 3 of a 5 year lease in exchange for an additional 3 years which extends the lease at the lower rent and gives the landlord a tenant in the space for a longer period.
If an office tenant is in an industry which is growing they may be better off with subleases or shorter term leases, say 2 to 3 years.  A business who grows steadily needs to time their expirations with their anticipated growth. 
If an office tenant's business is stable and not expected to grow or downsize significantly, then they may be better off negotiating a lower rent for a little more space and locking in the low rents now providing it is a tenant's market where they are.  Despite the economy, here in St. Louis we have one submarket with about a 4% vacancy and space is on the market an average of 7.3 months vs. some submarkets with double digit vacancies or availability and space on the market for over 25 months on average.
The tenant's amount of capital costs also will have a bearing on their length of lease.  They can amortize more improvements over a longer term.  That being said, they may also be able to get a longer term and lock in the lower rate if the landlord is able to amortize their capital costs over a longer period.
You should also consider the building condition. If  a building is a class B now, what is it going to be like in 5, 7 or 10 years.  If you are going into older buildings perhaps the term should be shorter so that if the building systems become antiquated or irreparable due to lack of available parts for old systems, do you want your clients and/or employees to have to work or visit an uncomfortable space?
Another thing that brokers can do is ask the listing agent how the buildings lease expiration stacking is.  Is it important to the landlord to stagger lease expirations so that they do not have say more than 8 to 10% of the building up for expiration at any given time?  Do they look at their expiration plan on a floor by floor basis to see how expirations are contiguous thus giving the landlord a more marketable space?  Perhaps a 4 or 6 or 8  year lease would assist the landlord in achieving their lease expiration stacking and staggering goals.  Working for a win/win situation like that may get the tenant an extra $1.00 off their rental rate and if an odd length lease term is of no consequence for them it does not matter.
Lastly, what are the lengths of the contracts the tenant has.  Do they have several long term contracts or several contracts expiring in a given year [mostly found with government or manufacturing, etc].  If they have 50% of their client contracts expiring in 3 years they may want to time a lease expiration to after those contracts are negotiated and negotiate strong renewal options in the lease.  They do not want to be busy with renewing client contracts while they have to search the market or negotiate a lease, yet they also do not want to have a long obligation beyond the major contracts in the event they are not renewed.
Lease Negotiations , Office Space , Office Space Negotiations , Tenant Representation

Renegotiate Your Lease Now...or NOT!

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Today's economic climate is without a doubt unlike any we have seen in many years. One does not need an MBA to see that the present state of our economy has impacted both the public and private sector and it has no limitations as to the size or type of company affected.    

 The relationship a company has with their landlord is quite unique in that it does not follow the pattern of most other business associations. Typically, when one partner in a relationship has an issue, the other partner looks to make an accommodation so the relationship can continue to flourish.    

 Unfortunately, that may not be the case when it comes to addressing real estate issues. On the up side, there are some strategies tenants can use to gain temporary relief from the burden of their occupancy costs provided they fit into certain parameters and understand the guidelines. On the down side, most landlords in particular landlords controlling multi-tenant office spaces are extremely reluctant to offer relief in particular through renegotiation of existing leases.    

 We have spoken to numerous landlords over the past months regarding this critical issue. To be sure we were compiling the most reliable information; we approached landlords who controlled all types of properties including multi and single tenant office buildings, industrial spaces and retail properties. To be further sure the information we received wasn't considered biased, we sought out several of our client's landlords as well as landlords who we have dealt with in the past but did not presently have any of our clients in their building.   

 It is said that if something happens once it can be a chance occurrence, twice can be a coincidence but three times is a pattern. It wasn't hard to see a pattern forming in that every landlord, regardless of the type of property they controlled said the same thing, "We understand the issue but it has to be beneficial to us as well."    

 With that said and understood, there remains several strategies one may follow provided specific circumstances come into play.    

 The most common "success story" for renegotiating a lease in today's down market is determined by the length of time you have on your lease. If you have under one year remaining on your lease, a landlord will at a minimum be more than likely at lease talk to you. No landlord wants to see empty space but they don't want to give away the farm. After all, they have a certain level of expectations when it comes to return on investment.    

 "Blend and Extend" deals are out there if creatively designed. As an example, let's say you have nine months remaining on your 4000 SF space and you're paying $2.40/RSF/mo but the market rate is now $1.95 for new deals in your building. If the landlord reduced your rate, he would have a $21,000 shortfall. However, if you renewed for an additional  51 months, in theory, the landlord can then spread that loss over the 60 months of the new term by adding $.09 to the market rate and writing a new deal at $2.04/SF. You get an immediate reduction and the landlord has a guaranteed cash flow.     

 Another success story can be titled, "Extend and Expand." We have had some landlords agree to this option as far as eighteen months out. In one case a client was paying $2.35 on 2000/SF but wanted to expand to 3800 SF. Market was $1.90 for the space. We worked out a formula where the landlord would recoup the lost revenue on the initial 2000 SF and blend it into the larger space. The $1.94/SF deal included tenant improvement dollars.    

 Another opportunity may come into play should your landlord either sell or refinance the building. If the debt service on the building is reduced, you may be able to renegotiate longer term deals with the new owner or under the refinance structure. Should your building be taken over through foreclosure, you may want to contact your attorney as well as your broker. History tells us a lot of options open up under that scenario including the fact you may be able to get out of your lease completely. The foreclosures of the early 1990's and the court rulings under the Dover Case may shed some light on that. Your attorney should be able to provide additional information and strategies.    

 If you find none of the above scenarios meet your circumstances and you are having extreme problems paying your rent, you can still approach your landlord for relief but be prepared to not only provide full financial disclosure but also have a solid plan for how you anticipate dealing with the economic downturn. Yes, this does sound like the auto makers going before Congress.

Guest Post by our Orange County, Ca Member
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Office Space , Office Space Negotiations , Orange County Office Space