Contributing Author: William F. “Felton” McLaughlin – CCIM, SIOR

When is it time to start the time-consuming search for new office space? Typically that decision is driven by one or more of the following: an upcoming lease expiration date, space that’s either too small or too large for your current needs, and/or the desire to own vs. lease. Whatever the reason, there are some important things to consider as you head down the sometimes arduous path to find new office space.

Time– The amount of time remaining on your existing lease term can either be an asset or a liability to you. Tenants that are not sweating out a lease expiration are less likely to be pressured by landlords looking for a quick commitment. So, it is imperative to start the process early before that expiration date starts to erode your negotiating leverage with prospective landlords.

Team– Have you picked the advisors you will need? A short list should include the following:

• Commercial Realtor– Someone with experience and a successful track record in tenant representation.
• Real estate attorney – Someone with experience and a successful track record in commercial real estate legal matters.
• Architect / space planner / office furniture provider – If you’re going to need new office furniture, many furniture vendors these days have in-house space planners who can design your layout for you.
• Contractor – More critical in a purchase if construction is needed.
• Commercial Real Estate Finance – Even if you ultimately decide to lease, not all landlords will fund 100% of the required build-out. Bankers can be a source of funds to finance your improvements, furniture, fixtures, and/or moving expenses.

Leasing vs. Buying

• Cost of occupancy analysis including debt service vs. cost of occupancy for leasing similar space.
• Analysis of pre-tax and after-tax benefits of ownership.
• Analysis of pre-tax and after-tax benefits of tenancy.

Leasing

• Site selection.
• RFP process – When landlords compete, you win.
• Business terms to be negotiated – Do you know what you can negotiate for? A short list includes:
  1. Rental rate / rent abatement – Should you negotiate for a lower Rent/SF or free rent upfront?
  2. Tenant improvement allowance – What should you expect as a “market” allowance?
  3. Credit for unused allowance – Can you negotiate for any unused allowance dollars to be credited towards rent?
  4. How do you negotiate for a higher TI allowance?
  5. Escalation clauses – What can be escalated? And how do you negotiate caps on the annual escalation?
  6. Renewal terms and rates – How many options can you negotiate for? And at what rate?
  7. Expansion option – How do you protect yourself if you’re successful and grow?
  8. Contraction/termination option – How do you protect yourself if business slows down?
  9. Parking – Is it all free parking? Or are there any parking fees to negotiate?
  10. Signage – How important is exterior signage to your business? Naming rights can be negotiated for tenants with a large enough presence in the building.
  11. Moving allowance – Will landlords pick up some, or all, of your moving expenses?
  12. Space-planning allowance – How do you convince a landlord to pay for your space planning.
  13. Hold-over rights – What happens if you’re not able to vacate on the final day of the lease?
  14. Sub-lease/assignment rights – Why are these rights important?
  15. SNDA – Subordination/Non-disturbance agreements.

Purchasing

• Site selection
• Business terms to be negotiated in a Purchase and Sale Agreement – do you know what you can negotiate with the seller for? A short list includes:

1. Price – What’s your price strategy on the initial offer you make?
2. Deposit – What percentage of the purchase price? And how much time before the deposit becomes non-refundable?
3. Financing contingency – If included in a purchase offer, what supporting documentation should you include?
4. Seller financing – What are the benefits to both buyer and seller?
5. Structural contingency – What elements of the building are considered structural?
6. Environmental contingency – What environmental hazards do you need to protect yourself from in the office market?
7. Municipal approvals contingency – What is the zoning and the permitted uses? Will your intended use require a variance or special use permit?
8. Defects discovered during due diligence – Can you negotiate for a financial cap on discovered defects?
9. Due diligence timeline and proposed closing date – Do you need time for municipal approvals and if so, how do you negotiate for extending the timeline?

As you can see, there are a multitude of business terms and decisions to be made when seeking new commercial space for your business – many of which can lead to very costly mistakes if not handled or negotiated correctly.

Can you do it all yourself? Maybe, but a better question would be, should you?

The world’s largest companies have decided not to do it themselves and to rely on experts in the field for advice. When selecting the expert with whom you will work, remember that Realtors® adhere to high ethical standards. Further distinctions in the commercial real estate world include Certified Commercial Investment Members (CCIM) and the Society of Industrial and Office Realtors (SIOR). Both are highly selective organizations whose members number less than 5% of all licensed commercial real estate practitioners in the United States.

If you need tenant representation or want to discuss other commercial real estate needs, give us a call at NAI Platform.

William F. “Felton” McLaughlin, CCIM, SIOR

NAI Platform

14 Corporate Woods Blvd.

Albany, NY 12211

[email protected]

Direct: 518-465-1400 Ext: 208

Fax: 518 465 1441

http://www.naiplatform.com/