Commercial Real Estate Lease Negotiation Tips

One of the greatest values a tenant representation broker can provide to his client is advice during the lease negotiation with a landlord.  A professional landlord negotiates leases every day, with the help of a leasing broker and an attorney.  The tenant, who rarely participates in the market, should even the playing field by enlisting the services of his own advisers.  Remember, hiring a tenant representative broker doesn't cost you money, but it can save you money.

Below are best practice guidelines for commercial real estate lease negotiations.  Please consider these tactics early in your space search process.  

1. Develop Realistic Alternatives to Create a Competitive Environment

Many tenants do not develop legitimate alternatives to their first choice. If a landlord believes you’re not willing to switch to a different property, you lose your negotiating leverage.  Tenants often make this mistake in a lease renewal scenario; their landlord does not believe they are ready, willing, and able to walk away. The key to a successful negotiation is creating competition between your current landlord and other landlords in the area.

2. Start the Process Early

Landlords know that the managers of other buildings can take six to eight months to create a space plan, get construction pricing, agree on a rental rate, prepare a lease document and ready the space for occupancy.  If a tenant waits too long before asking for a renewal proposal, he signals to the landlord that he's not developing realistic alternatives, reducing his leverage in the negotiation.  Landlords will drag out the process of a renewal in an attempt to limit the tenant's alternatives and reduce the tenant's negotiating leverage.

3. Knowledge is Power 

A quality tenant representation broker can provide valuable knowledge to inform your position in a negotiation. Your broker should be able to answer the following questions:
Is the office building being sold? 
Is the largest tenant moving out? 
How much free rent did the last tenant get? 
Does the building have HVAC or parking problems? 
What is the landlord’s financial situation? 

Your tenant representation broker should also analyze the market to provide a true “apples to apples” comparison of different facility choices.  Lease terms such as full service gross, modified gross, triple net, tenant improvement allowances, rental abatement, escalations, base years, operating expense stops and loss and load factors can obscure the true amount you’re paying and make legitimate comparisons difficult.  A good tenant representative will sort through all this for you.

Troy Golden is President of Golden Group Real Estate. He received his undergraduate degree from Yale University and his MBA in Real Estate from the Wisconsin School of Business. Troy specializes in commercial office brokerage in Chicagoland. Please contact him at troy@goldengroupcre.com or (630) 805-2463.

l Estate at www.scgroupco.com. 

Direct Lease vs. Sublease of Commercial Office Space

Direct Leasing vs. Subleasing
Business owners who wish to lease commercial office space may either lease space directly from the landlord or sublease space from another tenant.  Decision makers should review the advantages and disadvantages of both options.  The best option depends on the state of the business, market conditions, and lease terms.  Enlist the help of a qualified tenant representation broker to help you make the right decision.

Subleasing
A sublease arrangement is a lease transaction with a current tenant, subject to the approval of the landlord.  Businesses who sublease space typically benefit from below-market rents and lower buildout costs.  Sublease terms can be more flexible than direct lease terms.  Sublease arrangements may run month-to-month, or include special ad-hoc provisions.  However, businesses subleasing space end up having two defacto landlords, the original tenant and the building landlord, with twice as many restrictions.

Direct Leasing
A direct lease is a contract between two parties, the tenant and the landlord.  Direct leases are simpler than sublease arrangements.  With fewer parties involved, there is less chance for confusion of responsibilities or missing payments.  The landlord knows who is paying rent, and knows who to go to when a payment is late. The tenant knows who is responsible for common area maintenance, and knows who to go to when an elevator is broken.  However, professional landlords tend to be less flexible in negotiating direct lease contracts than most tenants are in negotiating sublease contracts.

Troy Golden is President of Golden Group Real Estate. He received his undergraduate degree from Yale University and his MBA in Real Estate from the Wisconsin School of Business. Troy specializes in commercial office brokerage in Chicagoland. Please contact him at troy@goldengroupcre.com or (630) 805-2463.

Reducing Office Space and Overhead Costs

Many business owners lease more office space than they actually use.  Since the Great Recession, businesses have decreased personnel and increased efficiency.  Of the remaining employees, a growing number telecommute to work.  Reducing excess office space will allow your business to cut overhead costs and increase efficiency. 

If you have extra office space in your lease, the first step is to check the lease for a cancellation option. If there is no cancellation option, check with the tenants on either side of your space to see if they need to expand. If so, you might work out a deal you can present to your landlord.  You can also try a blend-and-extend lease whereby you agree to terminate the existing lease and make up a new one for five years with reduced space or reduced price.  Your landlord may value longer term leases for the stability of his mortgage. Consider switching to another space in your current building. Your landlord may have a smaller suite available and look to rent your space at a higher per square foot figure.   

Another option is to list your space for sublease.  You may find a complimentary company that would share business machines and administrative assistance in exchange for renting a block of cubicles and a corner office.  You might be able to put up a wall between half your space and sublease out the other half.  Check your lease to see what restrictions apply to sublease.  You may want to consult with a real estate attorney.  Finding a sublease tenant and negotiating a contract requires time, knowledge, and effort.  A local, experienced, and qualified commercial real estate broker will make the process much smoother. 

Troy Golden is President of Golden Group Real Estate. He received his undergraduate degree from Yale University and his MBA in Real Estate from the Wisconsin School of Business. Troy specializes in commercial office brokerage in Chicagoland. Please contact him at troy@goldengroupcre.com or (630) 805-2463.

4 Advantages to Using a Tenant Representation Broker

1. More data, better analysis, faster results.  A qualified tenant representation broker has access to a complete database of commercial space in your market.  A business that outsources its real estate market research to a tenant rep broker enjoys a more comprehensive analysis while saving time for its employees.
  
2. Expert advice.  A season tenant representation broker provides expert advice backed by market data and years of experience.  This counsel levels the playing field during your negotiations with professional, full time landlords and their brokers.  

3. Real cost savings.  Your tenant representation broker reveals, analyzes, and documents all costs related to your lease, allowing you to execute a lease with peace of mind.  Your broker creates a competitive environment between Landlords to achieve greater buying power for you.  You pay no broker fees, your broker splits a fee with the leasing broker, paid by the landlord.  

4. Peace of mind.  Confidentiality is maintained so that employees do not become alarmed at a possible relocation.  Your broker guides you through a leasing process that gives you the best office space, with the most tenant friendly lease agreement, at the best price possible.

Troy Golden is President of Golden Group Real Estate. He received his undergraduate degree from Yale University and his MBA in Real Estate from the Wisconsin School of Business. Troy specializes in commercial office brokerage in Chicagoland. Please contact him at troy@goldengroupcre.com or (630) 805-2463.

3 Common Mistakes Made by Tenants

1. Relying on a broker with a conflict of interest, who represents both landlords and tenants.

It is best practice for tenants to rely on commercial real estate brokers who primarily represent tenants.  This practice ensures that brokers remain true to their fiduciary duty.  You would not have one attorney representing both parties in a legal matter. When so much is at stake financially and legally, you shouldn't have one broker representing both parties in an office lease transaction.

2. Not developing legitimate alternatives to the first choice in a space search.
The biggest mistake that tenants make is not developing legitimate alternatives to their first choice, whether they are interested in new space or a lease renewal. Brokers often hear, "I don't want to move, and plan to renew my lease for another term." Even if you don't tell your landlord, he will often draw that conclusion from your actions. Once the landlord understands this, a tenant loses his negotiating leverage. Even tenants who have no reason to move must develop alternatives to their current situation. Otherwise they risk spending money needlessly because they have forfeited all leverage in negotiating the terms of their renewal.

3.  Not hiring a broker to help with a lease renewal.
Tenants often say, "We don't want to move and intend to renew our lease. Why would we need a broker?"  Landlords hire professional leasing agents to negotiate the highest returns for the investment in their building. If the agent or landlord can sign a tenant at a higher rate, it improves the landlord's bottom line. The key to a successful renewal negotiation is creating competition between your current landlord and surrounding landlords in the area, while maintaining a controlled and organized process. Tenants need to have an experienced advisor providing the proper market research and negotiating skill that will create leverage for them. Tenant representation brokers can save you significant amounts of time and money on lease renewals.  The right broker will understand that you don't want to damage your relationship with the landlord. He will deal with every landlord in an aggressive, yet fair and professional manner.

Troy Golden is President of Golden Group Real Estate. He received his undergraduate degree from Yale University and his MBA in Real Estate from the Wisconsin School of Business. Troy specializes in commercial office brokerage in Chicagoland. Please contact him at troy@goldengroupcre.com or (630) 805-2463.

Business Relocation Checklist

When moving your business, it is helpful to have a game plan to make the relocation process easy and efficient.  

AT LEAST 4 Months Prior To the Move

Many business owners make the decision to move AT LEAST three or four months prior to the desired move date, on average.  The time required to survey space options, choose a location, and negotiate a lease depends on the size of your business:

office size	lead time
1,000 - 3,000 square feet:	4 to 6 months
3,000 - 10,000 square feet:	6 to 10 months
10,000 - 20,000 square feet:	8 months to one year
above 20,000 square feet:	up to two years in advance

During this lead time, you should accomplish the following:

• Obtain a commercial real estate broker
• Visit potential commercial properties
• Determine the desired new office attributes
• Create a basic timeline for the move
• Let your employees know about the move
• Set the date of the move
• Locate and obtain the new property

2 Months Prior to the Move

Two months before your move, you should take care of the following items: 

• Hire a moving company
• Order new signs for the business exterior
• Order new stationary, letterhead, business cards, etc.
• Contact clients and let them know of the upcoming move
• Set up utilities for the new business location
• Arrange for future cancellation of your current utilities
• Order new furniture
• Start organizing documents and office furniture for the move

1 Month Prior to the Move

Address the following items 1 month before your move:  

• Contact insurance provider for new office space insurance
• Order new office keys
• Assign office space to current employees
• Order new checks
• Update bank information
• Inventory and tag current electronics and furniture
• Obtain packing materials
• Notify USPS of address change
• Pack non-necessity items (those which won’t be needed prior to the move)

1 Week Prior to the Move

Address these final items 1 week before your move:  

• Back up office computers
• Pack remaining office items
• Label packed office items
• Pack up desk items/employee personal items
• Inspect new office
• Remind clients of the move
• Remember not to schedule client appointments until post-move
• Assign staff members moving duties

Day of Your Relocation

Take care of these items on moving day:

• Only have essential employees present
• Post signs in new office space to direct movers
• Direct movers in both locations
• Have food/drinks available for movers/staff members
• Final cleanup of old office

Troy Golden is President of Golden Group Real Estate. He received his undergraduate degree from Yale University and his MBA in Real Estate from the Wisconsin School of Business. Troy specializes in commercial office brokerage in Chicagoland. Please contact him at troy@goldengroupcre.com or (630) 805-2463.

What's the difference between Class A, Class B, and Class C space?

Office buildings are generally classified into one of three categories: Class A, Class B, or Class C.  Standards vary by market, and each category is defined in relation to its counterparts.  Building classification allows us to differentiate buildings and rationalize market data.  That said, classification is an art, not a science.  While a definitive formula for each class does not exist, the general characteristics are as follows:

• Class A. These buildings represent the highest quality buildings in their market. They are generally the best looking buildings with the best construction, and possess high quality building infrastructure. Class A buildings also are well-located, have good access, and are professionally managed. As a result of this, they attract the highest quality tenants and also command the highest rents.
• Class B. This is the next notch down. Class B buildings are generally a little older, but still have good quality management and tenants. Often times, value-added investors target these buildings as investments since well-located Class B buildings can be returned to their Class A glory through renovation such as facade and common area improvements. Class B buildings should generally not be functionally obsolete and should be well maintained.
• Class C. The lowest classification of office building and space is Class C. These are older buildings (usually more than 20), and are located in less desirable areas and are in need of extensive renovation. Architecturally, these buildings are the least desirable and building infrastructure and technology is out-dated. As a result, Class C buildings have the lowest rental rates, take the longest time to lease, and are often targeted as re-development opportunities.

Troy Golden is President of Golden Group Real Estate. He received his undergraduate degree from Yale University and his MBA in Real Estate from the Wisconsin School of Business. Troy specializes in commercial office brokerage in Chicagoland. Please contact him at troy@goldengroupcre.com or (630) 805-2463.

What are common ways for a lease to divide expenses between the landlord and tenant?

The commercial leases allows the tenant and the landlord to divide up expenses in several ways.  Industry jargon is often used to describe common arrangements.  Below are terms and descriptions for common arrangements in commercial leases.  Remember, every thing is up for negotiation in a commercial real estate lease.   

Gross Lease (full service lease) - the landlord pays for all operating expenses, property taxes, and property taxes. 

Single Net Lease – the tenant pays a monthly lump sum base rent as well as the property taxes. The landlord pays for operating expenses and property insurance.  

Double Net Lease (NN) – the tenant pays a monthly lump sum base rent as well as the property taxes and the property insurance. The landlord pays for all other operating expenses of the premises.

Triple Net Lease (NNN) – the tenant pays a monthly lump sum base rent as well as the property taxes, the property insurance, and maintenance. 

Troy Golden is President of Golden Group Real Estate. He received his undergraduate degree from Yale University and his MBA in Real Estate from the Wisconsin School of Business. Troy specializes in commercial office brokerage in Chicagoland. Please contact him at troy@goldengroupcre.com or (630) 805-2463.