1) Separate the Business points from the Legal Points Clearly understand and have agreement on the business points of the transaction before delving into the legal points. It will keep the negotiations clean and clearly differentiate the stages of negotiations.
2) Don’t let your enthusiasm to make a deal make you a bad negotiator. It is easy to get wrapped up in a negotiation and try to do anything to make the deal. If a negotiation fails to get you what you want, don’t look at is as a failure, but as part of the process of getting what you want. Move on to the next best alternative.
3) Carefully Review Operating Issues Think about the mechanics of how your business operates as you are reading through the Lease. Watch out for issues like (a) after hours HVAC service — is it available and how much will it cost, (b) do you make higher than normal levels of noise at particular times, (c) your employees love to cook popcorn in the micro-wave in the afternoon and that is strictly forbidden by the Lease.
4) Cost-pass-throughs and the new or partially occupied building If you are moving into a new or partially occupied building add some protection to the Cost-pass-through provision that will require the landlord to calculate your annual cost-pass-through based upon a 90% or 95% occupied building. This will protect you from moving into a building that takes a long time to lease up. The operating costs for a partially occupied building are significantly less that for a full one.
5) The Forgotten Part of the Lease - Rules and Regulations The smart tenant, the good broker, and the efficient attorney will always read the entire Lease. Not because it’s fun reading, but rather to understand the potential ramifications that could be set in motion should some unfavorable clause actually come into play. The key is to catch the problem before it occurs.
While everyone always reads the summary page and most read the next ten to fifteen sections, only a few get through the dry sections sixteen to infinity. Very few ever really read the Rules and Regulations. After all, it’s mostly non-issues like “Tenant may not have sales” or Tenant can't have pets.” Be careful, some of these hidden issues may actually impact you as a tenant. Read the Rules and Regulations as carefully as you do the rest of the Lease.
Can you cook in your suite? Most say you can't. Seems microwaves weren't invented when most leases were first drafted. What are the building hours? If it says 8 AM to 6 PM, what happens if you want to come in early or stay late?
6) Don’t Neglect the Workletter There are three main components to a lease agreement. The business points, the legal points and the workletter. The final, but no less important negotiation item is the Workletter. It is significant in many regards. Not only does it state what each party is to pay for but also what happens if the cost of the improvements exceed the allowed amount provided by the landlord.
In many cases, the landlord will give the tenant an improvement allowance in a dollar amount. On the other hand, when the improvements are simple and straight forward, the lease may state the actual improvements such as: “re-carpet, repaint, build out one office and extend the open kitchen.” In the former, you will typically have to deal with a Workletter and thus, understand its implications.
7) Tenant Improvement allowance is often applied to square feet The TI allowance can be applied to either useable square feet of the premise or rentable square feet. The rentable square feet is always larger unless it is a single tenant building, so the dollar amount would more. Make sure you understand to which measurement the allowance is being applied.
8) Your Operating Expense Cost-pass-throughs Whether your lease calls for an operating expense cost-pass-through or expense stop, make sure you know your starting point. Be aware of what calculation method is normal in your market. Depending on the market, your cost pass through base year should be either the current year or first year of the lease. It can be either calendar or fiscal. If your lease calls for an expense stop in which you pay for any expenses above a certain amount, get the historical information to allow you to make sure your expense stop is current so you don’t get stuck with unexpected additional cost.
If you are moving into a new or partially occupied building add some protection to the Cost-pass-through provision that will require the landlord to calculate your annual cost-pass-through based upon a 90% or 95% occupied building. This will protect you from moving into a building that takes a long time to lease up. The operating costs for a partially occupied building are significantly less that for a full one.
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9) The Sublease space option You’ve heard that you can get a really good deal on sublease space. It is true, but as with almost every benefit, there are increased risks. o Financial condition of the sublessor should be investigated thoroughly. If they don’t pay the rent, you suffer even though you paid them. o If the sublessor files bankruptcy, your sublease is at risk. o You are stuck with whatever terms and conditions were negotiated by the sublessor with the landlord. o There is usually no tenant improvement allowance to make changes. You will have to live with what you get or dig into your own pocket. o Sublease extensions are rarely granted by landlords at the end of the sublease term. Plan on another move or higher rent. What can you do to protect yourself? o Ask for some form of security from the sublessor. A letter of credit, for example, that will provide funds for increased rents or moving costs if the tenant goes out of business. o Once you've negotiated a sublease deal, take it to the landlord and try to convert it to a direct lease. Sometimes the sublessor will be willing to pay the net present value shortfall in rents to be free of the liability. o Make sure the landlord approves and signs the sublease agreement.
10) Level the Playing Field A Tenant renting office space does so only a few times in their corporate life. A landlord rents space over and over again. Level the playing field by taking advantage of the availability of a good tenant representative. You will find that there is usually no cost to you. In the long run, you will end up way ahead in not only the rent you pay but also in avoiding mistakes.
11) Ten Ways of knowing you'd better go back to the drawing board Find out if you on the right track or not. Beware of any of the following:
o While the size of the spaces you’re shown seem OK, none are laid out remotely close to what you need.
o When you ask if the suite can be remodeled, you’re told, “Sure, no problem.”
o Your broker sends you a 50 page computer print-out of every building in a 20 mile radius and asks you to point out which ones you'd like to see BEFORE meeting you or discussing your business.
o The broker is so familiar with the buildings you are seeing that the landlords actually let the broker put his name or his company’s name on a sign in front of their buildings.
o The broker’s cell phone burns up from calling ahead to landlords from his car with you in it to check on availabilities- assuming it’s not one of those “friendly” landlords.
o Three hours into the tour, the broker doesn't know the name of your company or what you do.
o You tour so many properties you end up having breakfast, lunch, and dinner with your broker.
o The sign on the side of the broker’s car reads “Tours-R-Us.”
o You can stand to not hear any more stories of how many BIG deals the broker did.
o At the end of the tour the broker assures you you'll get your first choice building and hands you a reminder card to call him in five years
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