What to know before you lease building space

Know what you’r edoing before you negotiate the lease for your business
For those seeking office or industrial space, representation by an experienced broker will save the user considerable time and money in his search, maintains Jack Quinlevan, a vice president with Trammell Crow’s Milwaukee office.
The commission paid by the building owner to the broker is typically three percent of the annual gross rent on a five-year lease and will be more than made up for in properly negotiated terms and conditions, Quinlevan says.
However, for those who want to go it alone in their search for office or industrial space, it pays to keep a few things in mind.
First, ask yourself how much space your firm requires, and how much space you will need two to four years from now, Quinlevan says.
Also, let’s say you’ve got a sales force of 10 people. Do you want them working in enclosed spaces? Or, do you place them out on a main floor separated by dividers. The enclosed option will cost more every time, Quinlevan says.
You also have to have a firm grasp of how long the process takes. Each step takes time: the search, the building walk-through, the space planning, requesting proposals, counter-proposals, negotiating the lease points, completing the construction documents, and the actual build-out of the space.
Remember, the listing broker can be overly optimistic in terms of the time it takes to complete the deal and get the prospective tenant into the building. Build more time into the equation.
Here are some other key points to remember, Quinlevan says:
Timing is critical – When does your lease expire, and what is the lease holdover language? If you don’t leave on time – say your lease expires May 31 and you have to stay longer – some lease documents say the landlord can automatically hold you over for another year. “It’s very contentious,” Quinlevan says. “Some guys find this out and they start screaming.”
Image – Do you want to be in the Firstar Center or a lower profile single-story office/industrial-type building? “Some people have told me that they don’t want to be in Class A high-rise space because their clients will think that they are charging more so they can pay their rent,” Quinlevan says.
Signage – If you don’t ask for it, you don’t get it. There is pylon signage on a totem-pole-like stack out front, or there is building signage. “If you don’t ask for it, you don’t get it,” Quinlevan says. Or, is it reserved for the largest tenant in the building? Don’t forget to ask about being included in directory signage and suite signage, both of which are considered standard.
Tenant mix – Be aware of who is in the building. You want to be sure you know who your neighbors are, and that they provide a good complement to your own business.
Negotiation points: unless you are experienced, it is hard to know the landlord’s asking rate and the deal rate. Some building owners may ask $20 per square foot, but the deal range is $18.50 to $19 in the actual deals as they are made.
Rentable vs. usable square feet – When comparing buildings, know the difference between rentable square feet and usable square feet. Usable square feet is the amount in between the walls. Rentable square feet incorporates common space such as halls, and bathrooms and lobbies. This can add 10 to 15 percent to the overall cost, Quinlevan says.
Tenant improvements – Understand what landlords are willing to provide in terms of tenant improvements. Keep in mind that landlords love to deal with tenants that are willing to take the space as is. However, in some cases, landlords are willing to pay up to $15 per square foot for improvements. “Often, people walk into an office, and they say it looks fine,” Quinlevan says. “What they don’t realize is that the landlord is willing to knock down walls and redo the space.”
Lease terms – Typical lease duration terms are five years, although some landlords will go three years. In some cases, landlords will offer 10-year terms with exit points negotiated at five years. There is a decided cost savings for locking in at 10 years, and you have the ability to get out and renegotiate if the market takes a turn, Quinlevan says.
Expansion options – If you are in a growth company and you need a defined amount of square feet, you’ll want to negotiate the option to expand into additional square feet. If you don’t negotiate it, the landlord could easily lease it out from under you. That could mean you have to sit packed into your space for the next five years when it’s too small for you.
Parking – Parking is scarcer in parts of downtowns than in the suburbs. If you don’t ask for it, you don’t get it. So you
“People will walk into an office space and say it looks fine. What they don’t realize is that the landlord is willing to knock down walls and redo the space.”
– Jack Quinlevan, Trammel Crow
need to ask and negotiate this up front. “In one deal we negotiated, we saw that there was a vacant space in the lot with four parking spots, so we grabbed those,” Quinlevan says. “If you don’t ask, you don’t get it, and it’s never volunteered.”
Lease language – Some leases are strongly slanted toward the landlord. You need to take a careful look at this, or, have an attorney review the lease on your behalf.
When performing your search, don’t forget to ask around, Quinlevan says.
“Somebody who is looking may want to talk to other tenants and ask them what the heating and cooling systems are like, whether building management is responsive, and whether tenancy is stable.” Also find out how many times the building has been bought and sold in recent years, Quinlevan says.
Finally, be prepared for escalations in rent, operating expense, and taxes.
The real estate investment trusts (REITS) have come into the Milwaukee area marketplace, and they need to show growth to their investors. So they are raising the rent. A typical increase would be two percent, Quinlevan says.
In most negotiated leases, the owner tends to pay the tenant’s portion of the operating expenses and real estate taxes for the first year of the lease. After that, the tenant will be responsible for any increases on a pro rata basis, with the tenant paying above a certain fixed amount.
May 1998 Small Business Times, Milwaukee