Smart Office Lease Negotiation for Middle Market Companies
Negotiating an office lease is generally an intensive and expensive experience when you consider how much your company will spend each year for a committed period. Middle market companies have some particular disadvantages in this regard, too. They have more extensive needs than a startup, and there may be fewer options for enough space to house those needs. At the same time, they lack the massive spending of large corporations, which often have leverage in negotiations — especially if they rent multiple spaces from the same owner.
Preparation is a vital component of successful office lease negotiation. As with any legal document, you want to be well informed and hire the right help. Here are four tips to keep in mind:
1. Study What Commercial Leases Entail
A commercial lease is a complex document that could run a hundred pages or more because of all the considerations and implications. The space may or may not come with parking privileges. A lease might seek to make you responsible for repairs and maintenance, which for an older building could mean you've essentially signed up to invest in the landlord's capital investment plan. There are questions of whether you can sublease additional space you leased in anticipation of future expansion or get out of the lease should the property prove problematic or sudden growth leave you in need of a different space sooner than anticipated. In the face of a disaster, your company might be obligated to continue paying rent, warns The Lease Doctor, even if it is impossible to operate out of the location. Depending on the lease language, your company could also share responsibility with other tenants for repair costs.
2. Count Up the Costs
Many people assume a lease's cost is the sum of the rent payments owed in a year. Commercial property leasing can involve a list of additional costs, however, which Hughes Marino says may not be initially apparent. Your business may owe payments for maintenance of common areas or grounds, utilities, janitorial services, plumbing and electrical repairs, elevator repairs, property management fees and reimbursements for labor. There may also be costs for keeping a building open or keeping the heating and cooling systems working past set hours on weekdays.
Also consider the total cost of occupancy, advises real estate firm Verity Commercial. In addition to the above costs, this would include furniture, any necessary building or remodeling, and Internet access. It also may involve soft costs such as the effect employee commuting time has on recruiting and retaining talent.
3. Consider Lease Duration and Growth
The length of a lease is another critical consideration, because it interacts with business costs and growth plans. Landlords will often push for longer periods, which are more advantageous to them. Shorter lease lengths typically cost more per year, but they may make sense if your company will have significantly different needs in the near future. At the same time, moving is expensive and disruptive. There are other potential approaches, such as leasing more space than is currently needed and subletting it (if the lease allows) to another business until you need it to accommodate growth.
4. Know How to Negotiate in a Buyer's or Seller's Market
General economic conditions can complicate negotiations. When companies are opening and expanding, there is more competition for office space and landlords can be more demanding. Such a situation may require either higher payments or more compromise on the company's part. In a buyer's market, chances are your business can get more for its money. The economy becomes a part of calculating the lease duration and adding an option to renew at current conditions, which you can use to lock in expenses if conditions shift to favor the landlord, or ignore in lieu of a renegotiation should the market swing toward buyers.
The most important point to remember is that an office lease should be treated as a strategic consideration, not a casual transaction. Learn as much as you can about the subject, but also plan on using a broker, not contracted to the landlord, who knows the specific market and (if possible) has already negotiated leases for the building. Hire a real estate attorney who specializes in commercial leases to review the lease document and look for potential problems. The short-term cost of negotiation will be higher, but in the long run your company will be better off.
Has your business recently negotiated a lease? How long did the process take? What worked in your favor, and what didn't? Let us know in the comments.
Erik Sherman is an NCMM contributor and author whose work has appeared in such publications as The Wall Street Journal, The New York Times Magazine, Newsweek, the Financial Times, Chief Executive, Inc. and Fortune. He also blogs for CBS MoneyWatch. Sherman has extensive experience in corporate communications consulting and is the author or co-author of 10 books. Follow him on Twitter and circle him on Google+.