7 Considerations When Negotiating an Office Lease Renewal

Negotiating an office lease

Hovering over your office real estate lease is always one thing: the lease renewal. Unlike residential leases, landlords will approach commercial leasees with proposals months in advance of the renewal date. Like residential leases, the terms for the renewed lease include a common element: higher rates.

What most businesses don’t understand, however, is that their fate is entirely in their own hands. Companies don’t have to simply bite the bullet and accept the higher rent conditions; instead, with savvy negotiating tactics and a few tips, you can often find middle ground with your existing landlords – or hunt for new space until the lease expires. Here’s what you and your team should keep in mind when it comes time to negotiate a commercial real estate lease renewal with your current landlord:

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Don’t Forget These Five Must-Haves When Signing an Office Lease

You have found the perfect office space for your company and now it’s time to sign on the dotted line and make it official – but what things should you ensure that you have in that office lease? After the ink has dried on the lease, there is no turning back, so make sure you don’t forget these five must-haves when signing an office lease.

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Why Brokers Won’t Return Entrepreneurs’ Calls

It’s a common complaint among entrepreneurs looking for office space. Why don’t brokers call them back? The truth is that the majority of brokers do return inquiries.

At OfficeSpace.com, we’ve found that how you phrase your initial request about space has a huge impact on whether or not you get a response. After analyzing 10,000 email requests in the last six months, here’s what we’ve determined to be the top three types of requests that do not get responded to quickly.

The wishy-washy entrepreneur  

When inquiring on a space, you have a wide range of what will work for you. You may have a huge range of space that you might need, and you don’t say when you need the space. You might need it right away or you might need it in six months. It can be fully built-out space or a wide-open bullpen.

While you might get lucky with a broker who is willing to spend the time extra time talking to you and helping you figure out what you truly need, most brokers won’t know how to prioritize their response for you as they fear you are not serious or that you will require a lot of work.

The short-term entrepreneur  

You request a month-to-month lease or something short term (less than one year). If you’re requesting a short-lease term you might as well be saying please do not call me back as far as a broker is concerned. This is fine to request if you are looking at a sublease or executive suite, but it’s not realistic for most landlords, so brokers will not want to waste their time with you.

The secretive entrepreneur

You don’t include enough personal information like your full name, company and any further details or descriptions of what the business use is for the space you’re inquiring about. The only thing you tell the broker is that details on the company are “under wraps.”

Brokers tend to de-prioritize these kinds of inquiries, because it gives them the impression that your business could be dangerous or illegal, which is obviously something the landlord would not allow in their building.

While it’s normal for entrepreneurs to want to keep details of their companies private for competitive reasons, there needs to be a balance with providing the necessary details for landlords. They will want to see financials and even a business plan if you are a startup with no track record.

Best practices

Based on our analysis, providing your full name, company name and specific details are ideal. For example, you might say that you are currently in a 5,000 square-foot space and are looking for bigger space, need a kitchen, two conference rooms and access to storage.

You can also count on a faster call back by including details that show that you’re an established company or what your timing is. You don’t need to divulge all your information, just enough to make the broker know that you are serious.  It’s not imperative that you sound like you know everything, just that you are serious.

So, the next time you spend the time to make the calls or emails to a broker, remember to give enough details and be thoughtful to get the fastest response back.

To get more answers to common tenant-related questions, visit our FAQ page.

This article was written by Susie Algard and  originally featured on Entrepreneur.com. See original source here: http://www.entrepreneur.com/article/235894

Startups, Get Your Finances in Order Before Leasing Office Space

This post was authored by Nathan Smith, a commercial real estate consultant and owner of Austin Tenant Advisors

As a startup or new business owner it’s important to be financially prepared before starting the process of looking for and leasing office space. Gathering your financial information and making your startup look financially strong in the eyes of a Landlord takes longer than you think so you want to do this well in advance. By preparing in advance you better your chances of gaining the Landlord’s confidence in your tenancy and increase your chances of negotiating better office lease concessions such as tenant improvements, rental abatements, etc.

Similar to how banks preapprove you for a loan, Landlords want to make sure you are financially qualified before they lease you office space, especially in hot markets like Austin, TX.   They will be investing time, resources, tenant improvements and other lease concessions in your tenancy so it’s imperative that you prove your financial ability & stability to pay any upfront costs and rent for the duration of the lease term.

Proving that your startup company is financially qualified takes more than a great business idea, having a large 401k, or a big expensive house.

If you are a startup company that has been around for a few years Landlords want to see current profit & loss statements, cash flows, balance sheets, and/or other sources of financing and funding. Depending on the landlord’s perception of your financials you may need to securitize the lease with a security deposit, letter of credit (LOC), personal guaranty or a combination of the latter. Your financial strength, lease term length, total lease amount, tenant improvement costs, & lease commissions will determine the amount needed to securitize the lease.

If you are a brand new startup with no track record or you’re an existing one with weak financials Landlord’s will probably want the person signing the lease to provide 2-3 years of personal tax returns and/or a personal financial statement. Depending on the Landlord’s perception of those personal financial statements they may require that the lease be personally guaranteed, need a larger security deposit, or need a letter of credit (LOC) that will cover the landlords up front costs to do the deal (e.g. tenant improvements, lease commissions, etc.).

Before you begin the search for office space, make sure you have your financials in order and have them ready to show Landlords. You might also consider having your business plan and pro-forma available to show your current and future financial projections.

Do all that you can to put your best foot forward, however because you are a startup Landlord’s still may require you to sign a personal guarantee, pay a larger security deposit, or have a letter of credit (LOC). You only get one shot at making a good impression! The more prepared you are and the better your finances look the better chance you have at proving to the Landlord that you can pay rent AND in receiving office lease concessions.

Nathan-K-Smith-Austin-commercial-realty-services-200x300

Nathan Smith specializes in helping startups companies find, lease and/or purchase office space in Austin, TX. He has advised over 300 companies in finding the best office locations, negotiate new leases and lease renewals, facilitate relocations and expansions. Outside the office Nathan enjoys hanging out with his wife and two children in Bee Cave, TX and is an avid runner and cyclist that participates in many local triathlons and running events.

5 Keys in Negotiating an Office Lease

You don’t get what you deserve. You get what you negotiate. This especially holds true in the world of real estate.

While the process of negotiating a commercial lease can be stressful for most business owners or decision makers, keeping these five factors in mind can ensure that you avoid some of the most common mistakes made by entrepreneurs:

1. Find leverage.

Regardless of whether it’s a landlord’s market or a tenants’ market, there’s always something that can be used for leverage.

One of the most important ways to create leverage is by use of time. Most leases take months to complete so avoid procrastinating when it comes to the office search. Don’t let a lack of time decide the lease terms.

Create leverage by keeping mum about feelings about the  space, especially to the listing broker or landlord. This will allow the broker to do a better job negotiating.

If the other party recognizes a desire for the space and that a prospective tenant can’t select anywhere else, the other side just received some leverage. It’s always a good idea to have alternative space options at hand.

According to Jason Bollhoefner, vice president at Corum Real Estate Group in Denver, “Always have a solid back-up option at hand, especially in an improving real estate market. Being prepared to walk away is a very powerful aspect of successful negotiation.”

2. Don’t think rates. Think term.

Tenants often become caught up in rates upon finding a space. While the rental rate is important, especially the gross rate, the term of the lease can have a more significant impact on finances.

Instead of worrying about bargaining for a few percentage points off the rate, spend time negotiating the term and thinking about the company’s true needs for the future. If the wrong term is selected, the tenant will likely end up paying more in rent for a space that doesn’t work for the company than what was saved by paring 5 percent from the asking rental rate.

3. It’s never true that a tenant gets anything free.

The length of the lease’s term also affects other key variables such as tenant improvements and concessions such as rent abatement. This goes both ways. Don’t lock into a term for the lease that’s years longer than initially desired just for free rent or better tenant improvement dollars. Such improvements are never free. Tenants need to understand that these costs are always baked into the lease’s value by the landlord. The landlord makes the money back at some point.

4. Arrange for a a solid legal review.

Keep in mind that a broker is not a lawyer and that brokers are paid on commission. Their commission increases based on the value of a lease. While brokers are experienced in lease negotiations, they do benefit from a tenant’s signing a lease and typically receive nothing if no lease is signed.

This structure, unfortunately, creates some conflicts. Paying an experienced real estate lawyer to review the lease should be a part of the negotiation process. The lawyer is paid regardless of the space chosen or even if the rental is postponed or a potential tenant walks away.

5. Negotiate protections for an exit.

Negotiate some protections for exits should things go wrong in the future. If a tenant feels it has good visibility for the next two years but not five, try to negotiate for some cancelation clauses keeping that in mind.

Finally, don’t forget to negotiate the lease. Unlike some things in life, the tenant does win from negotiating. Be creative to get needs met.

To learn more about the commercial real estate process, visit our FAQ.

This article was written by Susie Algard and  originally featured on Entrepreneur.com. See original source here: http://www.entrepreneur.com/article/237113

5 Lease-Term Questions Facing Every Entrepreneur

Now that you have chosen a space that meets your company’s needs, the next step is negotiating your office lease. One of the most important decisions for a company to make during this process is deciding how long they want to stay in that space.

Prior to starting your space search, and definitely prior to making any commitments on a lease term, ask yourself these 5 questions.

1. Do I anticipate changes that might affect my future space needs? A space that works for your company today doesn’t mean it will work for you a year or two down the road. It’s also important to consider whether the space will be effective in attracting the right kind of talent as your company grows.

As a new company, you might simply be relieved that someone let you lease some space, but recruiting a team is easier in some spaces than others.

2. Will I need to invest in improving the space or is it move-in ready? If you need flexibility in the term of your lease, and the space requires a lot of build out, don’t expect the landlord to pay for that.

Landlords expect to make their money back on any tenant improvement allowance by including these costs in your lease rate or term. Hence, a substantial investment in improvements may force you into a longer-term lease by amortizing the improvements over a longer period of time.

Be prepared to pay for tenant improvements out of pocket for shorter-term leases or expect a longer-term request from the landlord. Tenant improvements are never free.

3. Is the rent likely to increase in the future? Keep an eye on the local office market to get a general idea of rental rate trends. If using a broker, take advantage of their market expertise. Market comps are valuable data that a good broker can get for you.

Ask them to provide comps for the same building and comparable buildings to help you determine the trends. If considerable rental spikes are expected in the future, consider locking in a longer-term lease at the current rate.

4. Exactly how important is location for my business? Although primarily applicable to retail businesses, it’s always worth considering the potential impact of a space’s location. Your location may be important for attracting talent, situating yourself strategically among complementary and competing companies, establishing your brand and so forth.

If the success of your company depends heavily on location, or your company becomes more valuable because customers can find you easily, consider securing that space for a longer period of time. On the other hand, if your business isn’t particularly driven by location, you can be more flexible with the lease term. Finding a comparable space likely won’t be an issue, should the landlord decide not to renew your lease.

5. Will my rent be lower if I sign for a longer term? This is the trick question! Most entrepreneurs think that they must sign a longer lease to get the best deal. While landlords (and brokers) are happy to work with longer term leases, and will reward this with better incentives, that does not mean that this is a better deal for your company overall.

Lease term is one of the most important parts of your lease. Many brokers will admit their clients do not negotiate carefully enough. Ask yourself the right questions early to help you negotiate a term that works for your company’s current and future plans.

To get more information about lease term best practices other tenant-related topics, visit our FAQ.

This article was written by Susie Algard and  originally featured on Entrepreneur.com. See original source here: http://www.entrepreneur.com/article/235894

When Does it Make Sense to Use a Broker to Find Office Space?

With the explosive growth of small businesses in the U.S., more entrepreneurs are finding themselves negotiating and closing leases without the help of a broker. While at times it makes sense to do this, using a broker in the right scenario can greatly assist in securing the best possible lease for you and your company.

Before deciding whether you need extra help, it’s important to understand what motivates brokers and how they can benefit you during a lease transaction.

Getting their attention. Knowing how brokers get paid is important to understanding their motivations — and why sometimes, they don’t return your calls. Most brokers get paid a percentage of your total lease value, which is typically between 3 and 5 percent. However, this often isn’t the full amount your broker will receive, as they usually have to share a percentage of their commission with their brokerage companies.

Getting to a signed lease can be a lot of work. This can involve conference calls or face-to-face meetings, searching for spaces that satisfy your requirements, setting up and attending property tours and actual lease negotiations themselves.

A broker will have to do these steps for a company regardless of if they’re looking for 10,000 square feet of space or 500 square feet of space, but the difference in size means that the amount the broker receives will be significantly different.

This is why you might want to — or have to — represent yourself in a lease transaction for a smaller space. If your space requirements are bigger or more complicated, then there are instances where using a broker may be in your best interest. To better understand the potential costs of working with a broker, check out our FAQ.

Knowing the landlord landscape. It’s tempting for experienced entrepreneurs to think that they can deal with the landlord directly and save money by not using a broker, expecting that the landlord will pass savings on to them. While there may be times when this is true, there are just as many situations where it isn’t necessarily the case.

While you might do a lease transaction every three to five years, brokers do many deals every month. The end result is that brokers are likely to know more about the landlords operating in the local area than you do. They know the property owning landscape well: who is flexible, who is motivated and who will go the extra mile to accommodate a tenant.

For example, let’s say you are a growing company with the stability to sign a long-term lease if desired, but want to retain a short-term lease for greater growth flexibility. In situations such as this, an experienced broker can guide you to spaces with landlords who are not only flexible, but can accommodate you in alternative buildings while under your current lease.

Let’s say you run out of space two years into a five-year lease, you may have the option to transfer your lease terms and move to a larger space in their portfolio. Additionally, as opposed to having to take a large space that is intended to be grown into, a broker may be able to negotiate rights of first refusal on adjacent spaces one or two years into your lease term, saving you from paying that rent from the onset.

Striking a creative deal. A broker may also be able to work out a plan that works best for your company’s financial needs by getting creative with how your rent escalation is constructed. If you are working on a product launch that runs on an 18-month cycle, a broker may work with you to escalate your rent accordingly instead of a traditional 12-month rent increase cycle.

If you are facing a scenario where you may have run out of space completely, they may even be able to negotiate a lease buyout with the landlord so that you can move into their new space without paying double rent.

There are no hard and fast rules on when to work with a broker. Before putting in a lot of work shaving a few percentage points off your lease by saving the landlord from a commission, ask yourself if you’re paying for something that you shouldn’t have to or if there’s any flexibility that is worth more to your company than the rent savings.

These factors could amount to much more savings than the commission saved and passed to you.

This article was written by Susie Algard and  originally featured on Entrepreneur.com. See original source here: http://www.entrepreneur.com/article/235529

Broker Banter – Questions & Answers (The Portland Chapter)

We’re the first to admit we don’t always have all the answers when it comes to the fine details of leasing and all the questions that come with it. That’s when we turn to our commercial comrades to aid with the broadening of our knowledge base.  This week we’ve gone straight to the source to speak with Portland, OR broker Kristi Ricker.

We connected with Kristi to talk shop, and in fact, where to set up shop.

OfficeSpace: What do you think is the most important question a tenant should be asking, that they never seem to ask when looking for space?

Kristi: Zoning, tenants need to learn more out about zoning. There are so many issues in this area and if you’re not aware of this in the beginning it could hurt your chances of securing your ideal space. It’s something you should ask your broker about as they’ll be able to determine how to move forward in narrowing down your search. It’s just not something that’s on the top of your mind when you’re looking for a space and it definitely should be.

OfficeSpace: What is the best tip in negotiating a lease you think all tenants should consider? 

Kristi: The longer the lease, the better you’re going to be able to negotiate, especially if you are going to need anything done to your space. People are nervous with the idea of securing a 5 year lease, they think “What if something happens?” – but they can always put a clause in allowing them to sublease (A lease of a property by a tenant to a subtenant.).

OfficeSpace: What do tenants focus on, that perhaps they shouldn’t when searching for space?

Kristi: Recently, I’ve had clients who have looked at a space and were concerned the buildings around it were being worked on or unfinished. Unfortunately, this doesn’t always paint a pretty picture of the neighborhood, especially when it’s an up and coming urban area. I recommend looking at the bigger finished picture and inquiring about what’s being developed in the area.

OfficeSpace: What area of town would you recommend to a Start-Up in Portland?

Kristi: The inner Southeast, Northeast and North Portland are very hot right now. They were predominantly industrial areas and now they’ve turned into these very creative pockets with great opportunities for startups, restaurants, retail and more.

OfficeSpace: What are you starting to see more of in Portland?

Kristi: Tons of startups, restaurants, breweries, delis – there’s a great food scene here.

OfficeSpace: And lastly, what makes Portland great?

Kristi: Portland‘s so diverse, we have a little bit of everything for everyone. Everything goes here – that’s what I love about it. I see all these new ideas here and they seem to work. If you have a crazy, fun new idea, there’s a great support network for that here. It just seems out of the ordinary things work here more than other places. Nothing is guaranteed but your chances of making it a go seems to have better odds in Portland.

Kristi has over 15 years of real estate experience in the greater Portland area and has recently started her own company.

Need Office, Retail or Industrial Space in Portland? Visit us here – OfficeSpace.com/Portland

The Simple Math on Why Brokers Aren’t Returning Your Calls

If you’ve ever wondered why brokers aren’t calling you back when you’re looking for small spaces, let me break it down for you with simple math.

First, here’s some background on how brokers get paid:  brokers usually get paid a percentage of your total lease value.  What that percentage is varies from region to region but it’s typically between 3 to 5%.  However, brokers typically have to share a percentage of their commission with their brokerage companies.  This percentage can also vary but I’m going to use a 60/40-commission split for our purposes with 60% going to the individual broker.

To get to a signed lease, there is typically a lot of work.  There are calls or in-person meetings, searching for available spaces that meet your requirements, calls to set up property tours, the actual property tours and lease negotiations. All of the steps I mention above are the same for a company looking for 10,000 square feet of space as 500 square feet of space.  In addition, most companies looking for smaller spaces are unsure of what their space needs will be in the next year or two so they are only looking for shorter term deals whereas companies needing larger spaces tend to look for longer lease terms.  So, here’s what the math looks like in both scenarios:

500 square foot space x $30/square foot per year = $15,000 in annual rent

Lease term is 1 year:  1 year lease value $15,000 total rent (for ease of calculations, I’m assuming no rent escalation)

Brokerage company’s commission 5% = $750

Broker’s commission 60% of brokerage company’s commission = 60% x $750 = $450

VS.

10,000 square foot space x $30/square foot per year = $300,000 in annual rent

Lease term is 3 years:  3 x $300,000 = $900,000 in total rent

Brokerage company’s commission 5% = $45,000

Broker’s commission 60% of brokerage company’s commission = 60% x $45,000 = $27,000

This is a very simple way to look at the two deals. Every deal is unique but you can see that the numbers just don’t make sense for brokers with smaller spaces.  This doesn’t even take into account the number of times brokers work on a deal where they’ve put in their time and the deal goes dead for reasons outside of their control.   If you could spend the same amount of time for $27,000 versus $450, what would you do with your time?  Even if you tried to make a volume play, you would have to close 60 smaller deals to earn the same revenue that you would with one larger deal.

This is one of the reasons that we’ve built a site designed to allow tenants to self -serve.  By providing all of the relevant information about a space on our site, we are hoping that we can really cut down on the time investment needed for research and tours by brokers.  If you represent a small space that you need to get leased without losing money to get it leased, upload it to our site and ensure that you have lots of photos and that the information is complete.  We’ll be sending you qualified leads in no time.

Learn more about the commercial real estate process by visiting our Tenant Education Center.

The #1 Mistake Many Startups Make When Managing Growth. Remember the Garage?

In a galaxy far, far away…

In the beginning, most start-ups follow a certain pattern:

  • Inspiration leads to the “killer” idea
  • Bootstrapping
  • Sourcing Capital
  • Recruiting an A-Team
  • Product Development
  • Building an Infrastructure
  • Iteration
  • Managing increasing Costs
  • Growth

There are many versions of the story but in my own career and listening to the anecdotes of many other entrepreneurs, most folks like you and I have sang and are singing the same song.

Boot Strappin’ 

In the early stages, everyone including founding members are wearing many hats.

  • You may be starting your empire from the confines of your garage.
  •  You may be able to delegate certain tasks to your founding team of two.
  • You may want to hire or outsource but the cost benefit may not make sense at this time.
  • This may not be most efficient but it’s cost effective.

Everyone is burning the midnight oil to get to market as quick as possible and the Agile Development model is adopted. Your development team is furiously taking feedback and the products and business models evolve. You and your team have proof of concept now and the future looks bright.

Your first two revenue models don’t produce as you hoped they would, so you scrap them and finally find a revenue model that works for you.  Soon, the revenue grows from a trickle to a stream and it looks like it will be a steady stream. Life is good and all the blood, sweat, and tears seem to be paying off. Team morale is high and even the instant noodles taste infinitely better!

You Did What With My Money???

Depending on your cash situation, this may be the time you seek additional funding. You’ve proved your concept, generated revenue, and now you’re looking to scale that model. I won’t go into valuation models, capital structures, or optimal equity distribution, but another major attribute that most investors want to see is fiscal responsibility.

When I talk about fiscal responsibility, I don’t mean extreme conservatism, as say an accountant would, but more of a prudent balance of risk, reward, and stewardship. There will be a certain amount of cash burn related to the Agile Development process as some features will be pushed to the side or scrapped all together, but cash burn that locks you into long term contracts that increase your fixed cost structure that may not contribute to the business are things to look out for. This may be one of the most overlooked aspects of the start-up life.

Pre-Y2K Hysteria

In the early go-go internet days, many companies got to this stage and proceeded to secure prime Class A office space with room to spare for their burgeoning venture only to find out that they over estimated the growth that they would experience. This left many start-ups in a precarious position, after all, most start-ups aren’t experts in commercial real estate.

There are many more practical options for office space nowadays. We will always have the garage to start out in, move to a shared or co-working space, perhaps graduate to an executive suite space, or look for a screaming deal on a sublease space offered by perhaps some of the less fiscally prudent start-ups out there.

Your Space Says A Lot 

Many successful entrepreneurs look fondly on their days of bootstrapping:

  • Remember when we had to float all our credit card balances to pay for the gear?
  • I miss those days all 5 of us were huddled on top of each other in the basement working 14 hour days.
  • It’s lunch time, 7-Eleven or the Gas Station?

Another common thread among many successful entrepreneurs is balancing image from reality. From the type of marketing spend to the type of office they lease. Don’t be fashionable, be fundamental. If you just raised money, it can be difficult to justify contracting for prime office space when you’d rather hire more people to get you to your goal.  Not only will your investors appreciate this, so will all other equity stakeholders.

For all you start-ups out there, the sublease space may provide you with the most flexibility and lowest cost to leasing office space. Unfortunately, this market is underserved and is sometimes difficult to find. Many brokers also aren’t very helpful in this type of space search as they have to put in the same amount of time as a normal search but only get paid a fraction of their commission rate, on a sublease.

Craigslist is the most common place to find the smaller sublease spaces out there and they do a great job of aggregating those spaces. However, as many of you are familiar with, the craigslist experience is not for everyone, especially those that don’t have much time to spend on sifting through endless ads. Let alone setting up tours and other logistical tasks.

As you can guess, I work for a start-up called OfficeSpace.com and we focus not only on larger spaces, but smaller spaces and sublease spaces as well. We are looking to solve the small and sublease space problem and we’ve launched our Beta in Portland.

Stay tuned for my next article, where I will share an example of another start-ups’ experience. All the best to the brash, brave, and entrepreneurial companies out there. All comments are welcome!

Image credit: http://creativehomeoffices.com/wp-content/uploads/2012/02/Basement-Before-e1328914683809.jpg

Image credit: http://www.lifeknowledgefm.com/what-is-bootstrapping/