Renewing A Commercial Lease? Here’s What You Should Consider Asking For!

So, your commercial lease is coming due and you are considering staying put and signing a lease renewal with the landlord. Before you have the lease drafted, think about the concessions you’ll want from the landlord in return for signing on for more years. It’s all about negotiating the best deal you can possibly get from the landlord!

Here are a few things you should consider asking for:

Free Rent

Generally, you’ll want to try to get a free month of rent for each year that you plan on staying in the building. If you are signing a five-year lease, you’ll want to try and get five free months of rent. This will be dependent on location, the property and the landlord. In big cities with prime real estate, it will be a lot more difficult to try to get one free month for every lease year. At best, you might get two or three months of free rent on a five-year lease. It’s also likely that the landlord will want to spread out the free months of rent over the life of the lease (ex: three free months of rent to be applied to the first month of each of the first three lease years of a five-year lease) rather than consecutively in the first year of the lease renewal.

In the suburbs or when dealing with older properties, the landlords may be willing to offer more incentives for long-term renewals like a free month of rent for each lease year. Free rent can also be affected by other concessions which may be agreed to by the landlord.

General Improvements

A lease renewal is the perfect time to negotiate with the landlord to have general improvements made to the office space at the landlord’s expense. This may include, but is not limited to: (1) replacing the doors, windows or flooring in the office space, (2) new build out, expanding or reconfiguring of the existing office space, (3) adding, removing or replacing plumbing, lighting, electrical, fixtures and/or major appliances, (4) upgrading the restrooms within the office space (if applicable) and (5) repainting or touching up the office space. If you’re planning on staying in the space for a few more years, get the landlord to spruce up the place!

HVAC

An often missed or forgotten opportunity is the HVAC system. In buildings where the HVAC is tenant-controlled, you’ll want to know the age and condition of the HVAC system prior to the lease renewal. Most commercial HVAC systems run for about fifteen to twenty years when properly maintained and most landlords require tenants to maintain the HVAC system and have a HVAC maintenance agreement in place throughout the lease term. You should have a pretty good idea of how the HVAC has performed during the previous lease term and you should get an assessment from your HVAC contractor prior to the lease renewal to see whether the HVAC should be a topic of negotiation. In other words, you may want to negotiate with the landlord to have the HVAC replaced.

Depending on the size of the office space, there may be more than one HVAC system. The HVAC can be a split-system, packaged system, water-cooled system, etc. Repair and potential replacement costs of the HVAC system can become quite expensive especially if the HVAC has reached its manufacturer recommended lifespan. If you know the HVAC has reached its end-of-life, why not have the landlord replace the HVAC so that you know the system will be in its optimal operating condition during the life of the lease renewal term.

You may also want to negotiate having the landlord take on the responsibility and costs of the ongoing maintenance of the HVAC system including repair and replacement. Depending on the other lease concessions and the term of the lease renewal, the landlord may be willing to take on the cost in exchange for keeping you in the building as a long-term tenant.

These are just some of the items you’ll want to keep in mind when you are looking for concessions from the landlord as part of your lease renewal. While you might not get everything you want, the goal is to get the most bang for your buck!

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Before You Sign That Commercial Lease . . .

Before You Sign That Commercial Lease . . .

Finding commercial office space can be quite a challenge. While there’s certainly real estate available, finding the right office space that satisfies your business needs, fits your business vibe, is conveniently located, offers your business the flexibility to grow and which falls within your budget doesn’t necessarily come easy. And, even if you should find that “perfect” or “close to perfect” office space, you’ll still need to negotiate fair lease terms and work out the language in the final lease agreement before it’s a done deal. You don’t want to blindly sign on the dotted line!

First, negotiate the lease terms with the landlord. If you aren’t a strong negotiator or don’t feel you have the experience to negotiate, seek an experienced and qualified real estate broker who specializes in working for and in the interest of tenants. They should have insight into the real estate market and relationships with buildings and landlords to help you find the right space and negotiate, in good faith, fair terms with the various buildings and landlords.

Keep in mind that there are various factors which may help your negotiating power including, but not limited to: prominence of your business, size and financial position of your business, amount of commercial real estate space you intend on leasing and the length of the lease term (a longer term lease may offer you stronger negotiating power over a shorter term lease).

Once you’ve negotiated the lease terms to a point which are reasonably fair and agreeable, the landlord will have their legal counsel draw up the lease documents. Be sure to read the commercial lease agreement and all the applicable attachments, amendments, riders, guaranties and related documents thoroughly. Be sure that the lease terms and conditions, responsibilities and obligations of both the tenant and landlord are clearly spelled out and align with what has been agreed to during the lease negotiations. These include, but are not limited to: the start/end date of the lease, the lease term (number of years), the lease renewal and termination provisions, the date landlord shall deliver possession of the premises to the tenant, the date in which tenant shall surrender the premises to the landlord, base rent and any applicable rent abatement(s), additional fees and costs outside of the base rent (ex: cleaning, security, water/sprinkler), annual rent escalation (percent increase), proportionate share of property taxes and other applicable costs/expenses beyond the base year, the base year to be used for calculating property taxes and other applicable costs/expenses beyond the base year, electricity costs (ex: if the space is individually metered), HVAC (ex: if HVAC is tenant controlled – annual maintenance agreement requirement, who is responsible for repair/replacement of major components like compressor/condenser or replacement of the unit(s) in the event of a failure during the lease term? the landlord’s certification that the existing HVAC unit is in good operating condition; if HVAC is not tenant controlled, availability and costs for after-hours and weekend use), security deposit requirement, office space build out work and responsibilities, work to be performed by landlord, work to be performed by tenant (if work requires written approval by landlord), landlord responsibilities, tenant responsibilities, cost for building and office keys/key cards, covered and non-covered (a la carte) building services, commercial insurance requirement, “good guy” clause, etc. These are just some of the common items that typically appear in a commercial lease agreement which you should be on the lookout for and review carefully.

Even as an experienced business owner well-versed in negotiating contracts and agreements, it should go without saying that you should tap into and consult with a good real estate attorney who will thoroughly review the lease agreement and all the applicable attachments, amendments, riders, guaranties and related documents to make sure they are in order and contain the appropriate language to protect your interests. Let me be clear, having a good real estate attorney review the lease agreement does not mean that you should “pass the buck” and not exercise due diligence. YOU need to review the lease agreement thoroughly, make notes and consult with the real estate attorney so that you have a thorough understanding of what you are getting into before you sign and commit to the lease agreement. Don’t assume anything! Ask questions, get clarification and be sure you fully understand and are comfortable with the provisions of the agreement. Don’t think for a moment that any questions are stupid or silly. If it’s ambiguous, vague, unclear etc., get clear, definitive answers! Contracts and agreements often contain legalese which are difficult to fully comprehend and understand and may be vague and ambiguous.

Commercial leases are written for and inure to the benefit of the landlord. The objective is to try and get the lease terms to a point where the terms provide adequate protections, to the maximum extent possible, for you – the tenant. There may be several rounds of back-and-forth between you (and your legal counsel) and the landlord (and the landlord’s legal counsel) before you hash out the final language of the lease agreement so be patient, be thorough and exercise continued due diligence. This is one of those things where taking shortcuts will be more harmful than helpful. Don’t take shortcuts! Stick with best practices!

One final note . . . give yourself ample time to work through the process of lease negotiations and towards a final agreeable and acceptable lease agreement and whenever possible, have a backup plan. If you, with the advice of counsel, don’t feel comfortable with the lease terms and the landlord is not acting in good faith, don’t give in and don’t sign the lease agreement! Be prepared and willing to walk away! You don’t want to be stuck in an agreement for which you will ultimately regret!

Co-Working Spaces, An Option for Startups and Small Businesses

If you’re a startup or small business, finding the right office space for your business can be challenging. In addition, depending on where you are located, commercial office leases can be quite expensive. For commercial leases, landlords will typically require at least three years of financial information (ex: balance sheets, P&Ls, tax returns) from your business as part of the review process. A security deposit will be required at the time of signing (typically two to three months of rent). Landlords will also require the business to show proof of commercial liability insurance coverage and will want the building owner, landlord and management company named on the policy as Additional Insured.

Let’s not forget additional costs that may come with leasing an office space including utilities, cleaning, a HVAC maintenance agreement, property taxes and escalations. Many landlords will also require a lease commitment. While some landlords may allow for short-term leases (1-3 years), many will seek long-term leases (5-10 years).

As a startup or small business, you may consider running your business out of your home. While that may be suitable for some businesses, it certainly won’t be suitable for all. In addition, if your business requires frequent meetings with clients and vendors, having access to a professional office space and conference rooms become a necessity.

Co-working spaces have been growing quickly over the past several years. Companies like Regus, WeWork, TechSpace and The Yard, just to name a few, have swept up commercial real estate spaces and converted these spaces into turnkey co-working office spaces. Offerings may include virtual office space (access to a physical mailing address, phone number, voice mail, call answering service), day passes (day access to the facility, general meeting area, high-speed Internet), dedicated desk or office space of varying sizes (typically requires a monthly fee and commitment terms vary from month-to-month to 3, 6, 9 or 12 month increments) and flexible access to their other facilities and locations.

For startups and small businesses, turnkey co-working space agreements provide greater flexibility than typical commercial lease agreements, which help business owners manage tight operating costs. Co-working spaces may require a security deposit; however, they typically won’t require three years of financial information from the business. The monthly costs will generally be lower than a typical commercial office lease since you are only paying for what you need. Some co-working spaces may require that you carry commercial liability insurance coverage; however, the costs are generally more affordable since the office space will be significantly smaller. Utilities and cleaning services are usually included in the monthly fee and some conference room access (hours) may be included in the monthly fee. Some spaces may also include complimentary coffee, tea and water. Additional services may be purchased a la carte.

All-in-all, co-working spaces don’t sound too bad at all . . . so why even consider leasing a commercial office space?

While co-working spaces can be beneficial in the short-term, there are plenty of reasons why you’ll eventually need to find a suitable commercial office space.

First . . .  SIGNAGE! You’ve worked hard to make a name for yourself and your business so you’ll want your business name prominently up at the entry way to your office space. Unfortunately, the first name you’ll see with most co-working spaces will be the name of the company that provides the co-working space. While you may place signage for your business on the door to your individual space, you typically won’t be able to place any signage in the Reception area for the co-working space. This can be a major drawback for new business and potential business prospects.

Second . . .  Costs can add up quickly! The two major areas where your costs can quickly add up even if your office space needs don’t change will be conference room hours and Internet bandwidth. If you have a monthly agreement in place, it will typically include a fixed number of conference room hours as well as Internet bandwidth. If your business requires meeting with clients or vendors frequently, your conference room hours can add up very quickly. Likewise, if your business requires a lot of Internet bandwidth for uploads, downloads, streaming, etc., you could be faced with a ridiculously high overage bill for your Internet bandwidth usage.

Third . . . PRIVACY! Co-working space means there will be plenty of other businesses sharing the overall office space. Some co-working spaces don’t have fully enclosed offices. This means you can hear the activities of your neighbors. If you are able to find a fully enclosed office space within the co-working space, this might not be a big deal. However, if you happen to be in one of the spaces that are not fully enclosed, you might feel quite uncomfortable discussing business plans, strategies and so forth where nearby neighbors can hear those discussions. Granted, most co-working spaces may include privacy spaces (ex: phone booth-style privacy space); however, if you’re paying a monthly fee for an office space, you shouldn’t have to pop into a phone booth-style privacy space to have a conversation.

One other reason for eventually needing commercial office space is if your business grows, you will outgrow your co-working space. Sure, you may be able to find a larger office space within the co-working space; however, if that happens, you could be paying just as much (probably more) for the co-working space as you would for commercial office space. If that’s the case, finding suitable commercial office space will make much more sense.

Lastly, let’s not ignore the fact that there are alternatives to co-working spaces. For instance, you could lease part of an office space from another tenant (Sublandlord). While similar to a co-working space, the number of other businesses that operate within the office space will be limited, you may be able to work out signage at Reception, there could be more privacy and you can split/share the costs of overhead which will be mutually beneficial to both the Sublandlord and SubTenant.