BY: FRANK RICCI
The decision to lease office space is an important financial and business decision that requires consideration and competency. Leases are typically for an extended period of time, from 3 –10 years, and it is important to address the issues below in your negotiations and in the Lease document itself. Here are six important considerations to address before signing any lease.
1. Maximize your USEABLE space -
Office space is typically quoted on a cost per square foot per year ($/SF/YR) basis. Your goal is to maximize the amount of space within your four walls that you use for your practice, defined as “Useable Area,” and minimize the amount of space outside of your office for which you are charged rent. There are three common methods to calculate floor area and the method used can greatly impact your costs. These calculations are defined as: 1) rentable square feet, 2) gross square feet, and 3) useable square feet as described above.
Let’s define the floor area calculations used:
- Rentable Area (RSF): perhaps most commonly used, defines the areas within the walls of your suite, plus a pro rata share of the common areas of the building. The common areas consist of hallways, lobbies, restrooms, etc. but do not include vertical penetrations such as stairs or elevators. Typically, common areas make up 15% of a building’s area but can be greater in buildings with large lobbies, wide hallways, etc.
- Gross Area (GSF): includes the area within your suite plus ALL common areas. This may also include elevators and areas under canopies or drive through. Typically 18% - 20% of a building’s area.
- Useable Area (USF): includes only the area within the walls of your suite
EXAMPLE: Let’s assume you were to rent 5,000 sf of USEABLE space under each of these terms, how much space would you actually have to rent?
- Rentable Square Feet-we need to add 15% for common areas, so 5,000 sf + 15% = 5,750 sf
- Gross Square Feet, using the same logic, 5,000 sf – 20% = 6,000 sf
- Useable Square Feet – definition of USF is the space within the walls so 5,000 – 0 = 5,000 sf
In reviewing office properties to lease, make sure you are receiving the greatest value for your investment dollar. In this example, there is a 20% difference in the amount of space needed.
2. Negotiate for free rent and/or a tenant improvement allowance
Most landlords offer incentives to lease space in the form of “Free Rent” or a “Tenant Improvement Allowance.” Free rent is usually 1-3 months but is very dependent upon vacancy rates in the area. Tenant improvement allowances vary considerably, depending on the rental rate offered and the condition of the building. For reference purposes, it typically costs around $10/sf to refurbish an office with new paint, carpet, etc. and can run from $45 - $80+/sf to build a new office from a shell condition.
3. Negotiate for the greatest tax advantages
This is critically important and RARELY addressed. Your lease should specifically state how tax advantages are determined and who gets to write them off. If your lease does not state this in detail, you do not have specific items to depreciate, nor specific costs to write off at lease termination. This simple determination can eliminate your right to any deductions or your deductions may be disallowed and/or challenged by the IRS. A “Cost Segregation Study,” attached as an amendment to the lease can greatly benefit you and your landlord.
4. Address each of the following cost issues in your lease
Here is a list of items of expense that must be specified:
- Rent and rent escalations
- Common area expenses; cleaning, maintenance, repair, replacement
- Utilities; water, sewer, trash, electric, etc.
- Management fees; supervision, accounting, legal, leasing commissions, construction administration
- Real estate taxes, licenses and legal fees for disputing assessments
- Future regulatory assessments and impact fees
- Repair and replacement of major building systems; HVAC, Elevators, roof, windows, etc.
- Insurance; building, flood, sinkhole, liability, etc.
- Address each of these other important considerations
Here are some additional factors to consider in your lease:
- The leased premises, the method of calculation and changes to the method or basis of area calculations (Common areas in buildings can change.)
- The length of the initial lease term, especially if there have been tenant improvements
- Lease extensions, renewal terms and holdover provisions
- Flexibility - the ability to expand or contract the practice space requirements through options or a “First Right of Refusal”.
- Exclusivity – to limit competition within the building.
- Relocation – you may wish to strike this landlord option if involuntary relocation ma affect your practice
- Restrictions on use and/or procedures you may provide (typical on a hospital campus)
- Hours of operation – many buildings have standard hours and utilities may be assessed for after- hours operation and security. These charges can be significant.
- Macro factors that may affect your lease such as condemnation or property taking (i.e. for a road expansion) that may have deleterious effects such as noise, vibration, etc.
6. Additional Considerations
A lease gives you the right to control your particular space but not the rest of the property so some additional considerations are very important. Negotiate these issues up front, issues such as: parking and space assignments, signage, accessibility, options to purchase, handicap accessibility and many others.
Leasing space is an important financial and legal transaction and should not be taken lightly. It is important to have an experienced real estate broker and real estate attorney represent you. This combination of professionals provides the greatest protection at the least cost. Based upon their market experience, your broker should handle all of the preliminary issues, negotiate the rates and terms and prepare the deal points in a “Letter of Intent (LOI).”
Landlords typically furnish their own lease which the broker should review and “flag” for inconsistencies in rates, terms and verbiage. Any inconsistencies between the LOI and the lease can be further refined and determined to avoid numerous attorney reviews. Once negotiated, an attorney review should be completed to address legal issues before execution.
By following this 6 step plan, you should be able to move forward with confidence in the completion of your lease negotiations and securing your office space for your prosperous enjoyment.