Category: Commercial Real Estate Guides & Tips

Small business owners face the same challenges no matter the industry. Razor-thin margins, acquiring innovative talent, and competition around staffing and space restrictions. And while solving your square footage issues may seem daunting, it’s easier to calculate just how much additional space you may need.

Whether you’re expanding into a neighboring office space or moving your whole operation to a new facility, this guide should help you finally determine just how much office space you’ll need to expand, grow, and keep your budget in line with expectations.

Identify Your Needs

There’s no exact formula used to calculate just how much space a company needs. While the general rule of thumb is 100 square feet per employee and 175-200 square feet for executives and leadership, you have to take into account your workplace culture and the industry you’re in. For example, if you’re operating in biotech, medical, or any other industry that requires large equipment, you’ll need considerably more space per employee than a software startup.

Most modern companies opt for an open-style office layout, which has its pros and cons. On one hand, having everyone within easy access is crucial to team cohesion, but employees who require focused, intensive work environments may need more private areas in which to buckle down and achieve their goals – which is where a space with more private offices (or the ability to convert them into focus/quiet rooms) could be beneficial.

And if your company routinely accepts packages, vendors, partners, clients, and customers, you’ll want an adequate reception area to greet them while separating your workforce from outside distractions. Most open-office spaces don’t have dedicated reception areas, so you’ll want to factor in the cost of a build-out compared to other spaces you have in mind.

Find Available Space

Now that you’ve identified your primary needs in a new office space, the search can begin. But you’re busy with running the day-to-day of your company, so enlisting a go-to within your company to liaison with your real estate broker is not only a great way to delegate this task, but to involve your workforce more intimately with the search process.

Ask your team to gather a current list of cubicles, desks, shared spaces, equipment, and decor based on your current square footage. Then, based on your projected hiring goals, multiply those to more accurately estimate how much space your company will require over the terms of a commercial real estate lease. Not only will this help you determine what type of office space you’ll need, it’ll help you in the lease negotiation phase if you’re not willing to sign a long-term commitment.

Remember: private bathrooms, kitchens, and reception areas can contribute to as much as 30% of your leased space, so if you’re seeking a great space on a budget, opting for shared or common facilities will save you a considerable amount of money over the terms of your lease agreement.

Think Beyond the Headcount

While every business owner looks at the bottom line when making an investment, the non-tangibles can have a strong impact on future successes. Happy employees – especially in the startup phase – can have a significant impact on productivity and output, so considering individual offices, additional parking spaces, kitchen space, or impressive views can cost you more, but provide extra benefits beyond the number on the monthly rent check.

Tips for Finding the Perfect Amount of Space for Your Business

You Don’t Actually Need as Much Space as You Might Think

Depending on what level of employees you plan to hire, you may not need quite as much space as you’d think. If you’re planning to add several executive or senior-level employees, larger, more private spaces that accommodate meetings may be required. But if you’re adding headcount in the open office space (or “bullpen”), you may only need 100-150 square feet per additional employee.

Don’t Forget Remote Workers

Depending on the culture of your company, you may not need to expand as dramatically as you’d imagined. Should things get crowded (as they likely are in your current space), giving workers the option to work from home on regularly scheduled days can have a huge impact on morale and productivity, freeing up desk space and avoiding overcrowding. Just because your next space will be larger doesn’t mean the square footage needs to accurately adhere to your headcount.

There are Plenty of Ways to Save Space

Lunch and break areas, parking spaces, kitchens, and meeting rooms don’t necessarily have to factor into the equation – as long as you have a thoughtful alternative. If you’re operating in a high-density area, there shouldn’t be a reason why employees can’t utilize shared spaces throughout the building, take small team meetings off-site to a coffee shop, commute using public transit, and use shared kitchens. Take that into account when considering multiple options for office space.

How to Determine Your Needs for Common/Shared Spaces

While every office layout is different, the basic needs (as far as square footage is concerned) are generally the same. As follows, these are some basic guidelines when calculating your needs for common or shared spaces within your new office:

• -Conference/meeting rooms: 15-30 square feet per person
• -Quiet/phone call rooms: 25 square feet per person
• -Open space/quads/work group areas: 100-150 square feet per person
• -Lunch/break areas: 15 square feet per person
• -Restrooms: 30-55 square feet per person
• -Reception: 75 square feet per person

Now that you’re equipped with a good idea of how much square footage you may need in a future office space, it’s time to dig deep and do your homework to determine the pain points in your current office space and consulting with your team to identify “must-haves” and “like-to-haves” before beginning your real estate search. While no two spaces are exactly alike, keeping an open, but realistic mind during the process will significantly improve your chances of finding the perfect office space for your company’s current – and future – needs.

When a company enters into a long-term lease agreement, there’s a certain amount of risk involved. What if your company outgrows the space you’ve leased? What if business interests shift and your company needs to relocate to a more market-friendly area? Or, worse yet, what if the company folds entirely?

Rather than paying a termination fee, which can sometimes involve a significant portion of the remaining rent obligation plus forfeiture of the security deposit, some lease agreements allow for subleasing of a commercial real estate space to offset costs and avoid penalty charges.

If your situation involves any of the above criteria, it might be time to strongly consider subleasing your office space to another company. Here’s how – and why – you should sublease your office space.

Why You Should Sublease Your Office Space

There are several reasons for businesses to sublease an office space, but most have to do with financial implications. Breaking an existing lease is a costly endeavor and can lead to legal troubles most companies would seek to avoid, so subleasing a space to a responsible suitor is often the best option. That way, a business can avoid paying termination penalties and sacrificing the costs of a security deposit, passing along these costs to a third-party. However, subleasing means taking responsibility for a subtenant and doesn’t preclude your company from being ultimately responsible for the full monthly amount due to the landlord.

Here are some common reasons companies choose to sublease:

More Space Than You Can Afford (or Use)

While it’s important to consider potential growth when entering into a commercial real estate lease, it’s also possible that your company could wind up paying for space that it doesn’t ultimately need at the time. Until that period of growth comes, it’s beneficial to consider subleasing parts of your office space in order to pay for lost overhead. Even on paper, it makes more sense to recoup your investment on unused office space rather than letting it sit empty..

The Need for Larger (or More Suitable) Space

This is the most ideal situation in which to sublet office space. If your company grows beyond its bounds and things are starting to feel cramped, it’s time to expand and move into a larger property. But breaking lease agreements can be expensive and complicated, making it more attractive for tenants to seek a subtenant to offset termination costs and provide financial flexibility when seeking a larger space.

Your Company Downsizes or Folds

Unfortunately, business realities can take hold, forcing your hand in order to offset costs when a company goes under. But if you have a provision in your lease agreement that allows subletting, you can help pay creditors with the monthly rent payments provided by a subtenant should your business fail.

Pros and Cons of Subletting an Office Space

Pros:

• You’ll Offset Costs of Unused Office Space

The most common reason why companies sublet office space is to make the best financial sense of unused or otherwise unneeded space. After all, it’s a net loss to pay for square footage that your company simply isn’t using.

• Flexibility in Finding Larger or More Suitable Space

If you decide your existing space isn’t suitable for the need or size of your business, subletting your old space in exchange for a larger and more efficient property allows you the flexibility in financing an expansion without breaking the terms of your existing lease agreement.

Cons:

• Lease Terms May Restrict Your Flexibility

Depending on the terms of your lease agreement, you may only be able to lease a specific part of the building, space, or section of your office with the landlord’s approval. Ideally, a tenant would be able to sublease the entirety of the space they occupy, but that’s not always the case. Commercial rental codes, landlord preferences, and market conditions can throw a wrench in your subletting plans. Furthermore, certain lease agreements can prohibit you from subletting to companies or entities that have lower credit scores than yours, restricting you from subletting to a wide array of potential suitors.

• Hidden Costs Can Bite You

As the original tenant, it’s ultimately your responsibility for damages to the property and any repairs needed at the end of the lease agreement. Furthermore, even if you recoup the security deposit, any further damages to the property will be on your dime, making you liable for any actions by the subtenant.

Depending on the nature of your lease agreement, you may be on the hook for any overages in utility costs incurred by the subtenant. Most lease agreements dictate specific limits in utility costs provided by the landlord; anything outside of those costs could show a stiff bill at the end of the lease agreement – and that’s on you.

How to Sublet an Office Space

Step 1: Check the Terms of Your Lease Agreement

Before you start looking for subtenants, you want to make sure you’re legally capable of subleasing the space you’re currently occupying. Most commercial lease agreements prohibit subleases outright, but those that allow subleasing require approval from the landlord before ink sets to paper.

This is also the first opportunity in which you should get your attorney involved in the process, as they’ll have better insight into your ability to sublease a space per the terms of your lease agreement.

Step 2: Search for Subtenants

Depending on the market, you’ll almost always be able to find a company looking to capitalize on a reduced lease, reduced rate sublet – but your best options might be right around the corner. Your neighbors in the building may be looking for a better option, a larger space, or an expansion opportunity, and because they’re already tenants to the same landlord, all parties might have an easier time getting what they want.

Next, your subtenants should be carefully screened and vetted before an agreement is made. Because your subtenant will be paying rent to you and not to the landlord, you’ll still be liable for the total amount of the monthly lease – no matter who’s actually paying the bill. That’s why it’s crucial that you do your due diligence in finding subtenants who are able to pay the full amount and are able to maintain the property as per the terms of your original lease agreement. In other words, it’s on you if the subtenant damages or neglects the property while subleasing from you.

Step 3: Agree on Reasonable Terms and Determine What to Charge

If your subtenant is in the same (or similar) industry as yours, you may have an easier time transitioning the property to their specifications. But if extensive renovations or upgrades are required, you’ll want to spell out who bears the costs of those improvements and who will be responsible for any stipulations in the original lease agreement should the landlord require you to restore the property to its initial condition. These can include utility costs, amenities, branding or signage, furnishings, and specialty upgrades.

Furthermore, determining costs and breakdowns of utility contributions is essential at the outset of a sublease agreement. While market conditions may suit your company favorably when considering a sublet, some lease agreements prohibit original tenants the ability to charge more than the original monthly rent amount in order to make a profit on the space itself. However, it’s common for tenants to require subtenants to pay the full amount of the original security deposit in order to protect themselves from damages incurred, which should mitigate potential risk.

Step 4: Finalize the Sublease

Once you’ve covered all your bases and consulted with both your landlord and your real estate attorney, it’s time to sign the agreement and finalize plans for your company to relocate and bring in a subtenant under your original lease agreement.

The Difference Between Sublets and Assignments

Subletting and assignments are two very different practices in commercial real estate, although they’re often confused.

Subletting involves the original tenant retaining the responsibility for the lease agreement with the landlord despite two or more parties being financially responsible for the monthly rent. Landlords tend to prefer these types of agreements due to that factor.

Assignments are more attractive to tenants, but riskier for landlords. With sublets, the responsibility for monthly payments remains with the original tenant, making them ultimately responsible for the subtenant’s contributions. With an assignment, the landlord must evaluate a new tenant, who must demonstrate financial stability and reliability in addition to the original tenant. However, assignments provide the landlord the ability to deal with only one tenant at a time, simplifying their oversight of the property and freeing them up to negotiate a new lease once the original agreement is complete.

With assignments and sublets, landlords and original tenants must consider several factors, including:

• -Financial stability of potential new tenants
• -Any changes in the terms of the lease agreement
• -How much obligation the original tenant holds
• -Costs of monthly rent and any overages to be paid to the landlord on behalf of the original tenant or subtenant

As with any legal agreement, any commercial lease agreement that prohibits subletting or assignment should stop any negotiations in its tracks. Ideally (at least in the eyes of the tenant), a lease agreement should specifically define the tenant’s ability to sublet or assign a commercial space and also define the landlord’s ability to refuse such an arrangement – and why.

Landlords often define the terms of a potential sublet or assignment using the following criteria:

• -Retaining approval of proposed use of the leased space
• -Legal and financial analysis of any fees incurred during the subtenant review period
• -Business and industry review to verify potential conflicts of interest with other tenants

As long as your lease agreement allows for subletting extra – or the entirety – of your space, the decision lies between you, your landlord, and the subtenant. It’s a difficult process to filter out the appropriate subtenant, but a worthy time investment given the financial benefits to all parties. You save money on space you no longer need, the subtenant finds a suitable environment for near or below market value, and the landlord keeps collecting the monthly payment. But ensuring the situation is right for everyone is ultimately the responsibility of the original tenant, so be sure to do your homework before committing to any sublet agreement.

A commercial real estate lease is second only to payroll when it comes to monthly overhead for companies large and small. That’s why negotiating the best possible lease agreement for your business is critical. It’s a reliable, predictable expense that you can build into any budget and depending on the terms of your agreement, you may be able to save enough money to afford more employees, invest in substantial marketing, or simply upgrade your employees’ workspaces when an office move occurs.

But because no lease is written the same way, there are several factors a prospective tenant needs to consider before entering the negotiation phase of a commercial real estate lease agreement. Depending on the market conditions in your area, you may have more leverage than you realize and have a better position in which to negotiate more favorable terms for your company – and that’s where a tenant representation broker comes into play.

First Thing’s First: Establish Leverage

No matter the market conditions, there’s always a way to find leverage in a real estate negotiation – and don’t think your prospective landlord isn’t searching for the same thing.

Time is a major factor. Because lease negotiations can take months – even years – to realize ink on paper, it’s important to demonstrate that you’re looking at multiple properties and are ready to move soon.

Furthermore, when touring a space, it’s important to keep your thoughts and feelings between you, your team, and your representative. Showing the landlord’s broker that you’re excited about their space will only count against your prospects. According to Jason Bollhoefner, vice president at Corum Real Estate Group in Denver, “Always have a solid backup option at hand, especially in an improving real estate market. Being prepared to walk away is a very powerful aspect of successful negotiation.”

Think in Terms of Time, Not Price

Especially if you’re operating in a rapid growth industry, there’s a reasonable expectation that your company will grow at a regular pace over the terms of your lease agreement, which is why it’s important to consider a longer-term lease at a lower rate than a short-term agreement that could cost you more in the final analysis.

But because newer, growing companies can look at long-term lease agreements with a cautious eye, try negotiating for renewal options at a regular pace. Rather than opting for a four-year lease, offer the landlord a two-year commitment with two-year renewal options that give you right of first refusal to ensure you’re not locked into a space that’s either too small, too large, or simply too expensive for your needs.

There’s also something to be said for negotiating on neighboring spaces should you grow beyond your borders. If you’re a startup or small business expecting rampant growth within the next few years, but can’t afford the amount of space needed to cover that future expansion, negotiating for options on vacant space within the building could demonstrate to the landlord that you’re serious about staying with them and won’t fly the coop once your agreement is over.

Consider Your Subletting Options

Startup companies operating in volatile industries should strongly consider their options when looking at long-term lease agreements. Should your company grow beyond the capacity of the space or shutter unexpectedly, it’s worthwhile to ask a prospective landlord about the possibility of subletting an office space you’re about to occupy.

There’s also the aspect of assignment clauses, which could cause problems should your company take on new investors. Often, commercial real estate leases include clauses that alter the terms of the lease should a change in 50% or more of the company’s ownership changes – which would void the lease agreement entirely without the landlord’s prior approval. In this instance, it’s important to be as transparent as possible with a landlord and discuss your company’s opportunity for future investment to avoid any conflicts down the road.

Think About Cost of Rent and Escalations

Most commercial real estate lease agreements come with built-in annual rent increases based on the percentage increases in the Consumer Price Index for your market, leaving you on the hook for unforeseen increases on your monthly payments. However, if you negotiate for CPI rent increases on a delayed basis, you can lock in a predictable monthly rent for your company for a few years before your overhead changes. Alternatively, you could ask for a cap on the total percentage of each year’s CPI increase or a fixed increase on an annual basis, allowing you to budget accordingly year-over-year.

Be Cautious of Repair and Improvement Clauses

Commercial lease agreements sometimes speak in broad strokes, opening tenants up to unwarranted expenses at the end of the lease – especially when it comes to any repairs, improvements, or replacements of equipment that occur during the length of the agreement. You should always negotiate for terms that dictate your company will return the property in its original condition, excluding everyday wear and tear, damage from unforeseeable accidents deemed not to be the fault of the tenant, and any alterations previously approved by the landlord. You’ll also want to get documentation of any repairs, maintenance, or upgrades conducted on the property throughout the life of the lease to ensure you’re not on the hook for expenses once you move out.

Look Out for Landlord-Friendly Provisions

Form lease agreements are incredibly common in commercial real estate, making it easier for landlords to dole out blanket provisions that benefit them rather than negotiate on key factors party-to-party. Look out for the following commonly-used provisions to help make the best of your occupancy should you decide to take the lease:

Provisions About Passing Along Operating Costs

Landlords often try to put operating expenses (with or without limit) to tenants, including property taxes and any future increases, building repairs, maintenance costs, contributions to building staff payroll, and insurance premiums. Furthermore, should the landlord sell the property, they may also try to pass along the tax increases resulting from the sale to the existing tenants.

As-Is Lease Provisions

Especially common for older properties, landlords sometimes try to pass along buildings as-is to avoid responsibility for conditions that fail to meet regulatory guidelines like environmental laws or the Americans with Disabilities Act.

Landlord-Specific Protections

While it’s understandable for landlords to protect themselves against further costs, they can often go too far and cause undue strain on the tenant. Look for provisions in the lease agreement that allow the landlord to terminate the lease at their discretion, prohibit subletting, or require a personal guarantee from shareholders or principals of the company.

Before you sign a lease for any property, you’ll want to consider the factors above in addition to the overall “feel” and tenor of the landlord themselves. If they exhibit unwilling behavior or seem overly protective of their interests without considering the needs of a prospective tenant, you may want to look elsewhere. Whatever you do, don’t go it alone – a tenant representation broker and a good lawyer should be at your side during every step of the negotiation process to ensure your company is protected.

If you’ve been in the market for commercial real estate space, you know the difficulties that come with finding and securing the right space for your budget. Outside of a long-term rental commitment with a landlord, your options are limited between subleasing office space or a shared office space.

Most commercial real estate leases involve the tenant renting space from a landlord or property owner, but subleasing extra space complicates the agreement a bit. Tenants become responsible for the subtenants, meaning they pay for their space and you pass along your portion of the rent to the tenant. Prime candidates for subleasing office space include sole proprietors, freelancers, and startups seeking an affordable alternative to full-blown commercial real estate leases.

But there are plenty of aspects of an office sublease that should be taken into account before you take on someone else’s lease – and start saving a significant portion of your rent.

Continue reading “What You Need to Know Before You Sublease an Office Space”

After you’ve done your research, worked with your tenant representation broker, participated in site tours, and figured out your budget, the perfect commercial real estate property is finally in your sights.

Unlike most residential real estate deals, commercial real estate is complex, complicated, and often progresses at a glacial pace. Existing tenants may need time to vacate. Major systems will need maintenance and upgrades. Build-out details will need to be verified and finalized. But until the ink is dry, prospective tenants don’t want to let a suitable property pass them by.

The answer? A signed Letter of Intent (LOI), declaring your formal interest in purchasing or leasing a commercial real estate property.

Continue reading “Commercial Real Estate Letters of Intent: Everything You Need to Know”