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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

Video on Virtual Offices

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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

Lease or Rent Office Space?

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Do you know the difference? Most people use the terms interchangeably, but there is a difference. When trying to figure out what people are looking to do, we investigate both alternatives. Google tells us that their average monthly search volume for the fol owing terms are:

  • Office Space for Rent 27,500
  • Office Space for Lease 60,500
  • Office Rental 90,500

So it looks like more people are looking online to rent office space than to lease office space. What do they really mean? They are probably not sure themselves.

Here are the definitions from Wikipedia:

Renting is an agreement where a payment is made for the temporary use of a good or property owned by another person or company. The owner of the property may be referred to as the lessor and the party paying to use the property as the lessee or renter. There is typically an implied, explicit, or written rental agreement or contract involved to specify the terms of the rental, which are regulated and managed under contract law.

Leasing is a process by which a firm can obtain the use of a certain fixed assets for which it must pay a series of contractual, periodic, tax deductible payments. The lessee is the receiver of the services or the assets under the lease contract and the lessor is the owner of the assets. The relationship between the tenant and the landlord is called a tenancy, and can be for a fixed or an indefinite period of time (called the term of the lease). The consideration for the lease is called rent.

Diffen clears it up a bit with:

"Rent is defined as a payment made periodically by a tenant to a landlord in return for the use of land, a building, an apartment, an office, or other property. A payment or series of payments made by a lessee to an owner in return for the use of machinery, equipment, etc.

Lease is defined as a contract renting land, buildings, etc., to another; a contract or instrument conveying property to another for a specified period or for a period determinable at the will of either lessor or lessee in consideration of rent or other compensation. The property leased"

Here is their kicker:

"Standard rental agreements are month-to-month, and there is no set period of residence. Both the landlord and tenant are free at the end of each 30-day period to make changes to the rental agreement, subject to any rent control laws. A lease has a finite term, which is often a long period of time, generally in years. During this time period, also known as the duration of the lease, the tenant and the landlord are bound to uphold the terms of the written agreement."

So, unless you are really looking for an office space on a month to month, short term basis, you would want to Lease Office Space instead of an doing an Office Rental. Based upon our experience, very few people are looking for a month to month office rental and it is the terminology that has confused them in what it is they really want to do, which would be Lease Office Space!

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Sublease Office Space Plentiful

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A recent article in the NuWire Investor describes the state of the sublease office space availability throughout the US. In a word, plentiful. In fact, Cushman and Wakefield has pegged the amount of available sublease space at 10.3 million square feet at the end of the first quarter. Cities experiencing the largest increases in sublease office space include New York, Chicago, San Francisco, Denver and Boston.

My educated guess is that there is a lot more sublease office space available than is reported.  With all the recent layoffs, many companies have probably not had time or been willing to prioritize getting their excess space listed.  Many of these companies have more to worry about than a little excess office space. They are trying figure out how to survive.

A word to the wise. If you are considering renting or leasing sublease office space, be careful.  There are many pitfalls that need to be navigated to make sure that your sublease will stand up in the event the sub-lessor defaults. Makes sure to work with someone who knows the ins and outs, otherwise you could find yourself with nowhere to house your employees when you get evicted... without any fault of your own.

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