Wednesday, August 3, 2011

Top 4 Keys to Making Smart Office Leasing Decisions

A business space lease is something you only have to deal with every few years – but of course it’s important to your company so you want to make a good, informed decision. So what are the keys to making this decision, from the perspective of other business owners and people involved in many transactions? I’ve been representing tenants in leasing and buying properties for their business operations – office, high-tech and manufacturing space – and here’s a “quick list” distilled from client feedback and experiences over the years.

• Remember the big picture – keep the deal and specific points of the deal in context of what your business needs for its overall success.

• Approach it thoughtfully and with a good process in mind – this ensures you get the best deal in any given market environment for your firm.

• Use a team and tools to ensure you have the objective and subjective input you need to support your decision making process.

• Be sure the documentation reflects the deal you believe you’ve agreed to. The landlord may tell you the lease document is standard, but there is no standard and to avoid potentially crippling problems it deserves the time and attention to get it right.

Keep the big picture in mind - all the way through

It’s easy to get distracted by urgency and the many small but important details and time involved in going through the lease process. The best context for all this, keeping things in perspective, is to be clear going in what’s important to your company and you going forward. Here are some of the top trouble spots to be aware of:

• It’s about the future, not the past – what are your priorities and needs going forward?

• Marketing, branding and positioning in your marketplace may be impacted by your space.

• Recruitment and retention are often influenced by business space decisions.

• Logistics to clients, daily transportation, goods & supplies or the airport may be important.

• Environmental issues for an increasing number of companies is critical – air quality, waste stream management, energy efficiency of the building, access to services and mass transit.

• Financial ramifications – everyone focuses on the rate, but flexibility can be critical, as can the clause about assignment and subletting. It’s a rude awakening if you want to bring in a partner or sell and you realize you’ve given your landlord the ability to approve or extract concessions from you to get your financing or sale transaction done.

Good Process provides solid foundation

A good process produces consistently good results. Given the complexity of many deals, a thoughtful approach ensures you make a well informed decision. A general framework should include:

• Clarify your needs and requirements

• Determination and preliminary assessment of options

• Request for proposal process for top contenders

• Keep a fallback until the end – you need it to not give up leverage

• Negotiate, clarify and systematically compare on an objective and subjective basis

• Document well

• Design and construction if part of the deal

• Move and celebrate

Use a good team and tools

It’s not rocket science, but it is a set of skills and information that you don’t deal with on a daily basis. It is in addition to all the other things you have on your plate running your business and you’ll be spending a fair amount of time with who’s representing you, so choosing a representative (broker that represents business tenants) that’s a good fit for you and your firm’s values. Some key elements and tools to consider include:

• When choosing someone to represent you - experience helping business tenants not landlords is critical. Representing landlords is a marketing job. Representing tenants is a service job and involves a broader, more technical skill set to do it right.

• Using net present value to critically evaluate the range of proposals you’ll see. There will be variations in rate, operating expenses, how tenant improvements are handled, rate increases, the load factor, how efficient the space is for your specific needs, parking costs, moving and rent abatement, off hour use, how the space is measured, etc. A comprehensively designed NPV worksheet is invaluable in the negotiations and to help you in having an objective apples-to-apples assessment of alternatives.

• Team players – it’s important that your tenant representative can work well with you of course, but also your CFO, Operations manager, legal counsel and communicate well with your banker, the architect, contractor and building management team. All of these are important to getting the best decision and setting in place solid go-forward expectations and working relationships.

Documentation - a critical clarification process

After the months of getting to a deal you’re good with, the deal isn’t quite done yet. The lease document is like its own mine field just before the finish line. It’s not uncommon for the lease and related addenda to be 40 pages, and if it’s a sublease you have essentially two lease documents combined and your situation is guided by the most restrictive elements of either document. This is where your tenant broker and your attorney working well together is important to ensure you get what you’ve spent a lot of timing working toward. Some key points are:

The work letter – the part of the document that spells out the improvements, who’s doing what, who’s responsible for the process, construction, what costs are the landlord’s and what if any are the tenants responsibility.

Who’s signing – you personally? The Company? If it’s the company, is there a guarantee? Is it a reasonable amount relative to the landlord’s actual risks or for the entire lease obligation?

Assignment is often glanced over but shouldn’t be. If you want to partner up or merge or sell, many leases don’t have any criteria or set a very low threshold at which the landlord has sole discretion to decide if they will allow and assignment or subletting. You don’t want your business subject to arbitrary involvement by your landlord.

Mechanisms for extensions, expansions, give-backs, determining market rent, and the timing of each of these are additional potentially critical issues to be aware of and understand – and to negotiate if the starting document is unreasonable.

Don’t get sucked into the “you can trust me” by the landlord regarding ambiguous language. The response I often use is “I’m sure that’s true, but since we don’t know if you’ll still be the person we’re dealing with we have to make sure the document reflects what is reasonable and not rely on a verbal understanding”.

Of course you have to tailor the approach to the landlord – many are quite reasonable. Some you will need to rely on your fallback to have the fortitude to hold firm on some critical items (and of course stay reasonable yourself – keep the big picture context in mind).

Celebrate Completion!

This isn’t one of the four keys, but I highly recommend that after you’ve executed the lease (and the landlord has too) you should do a provisional celebration. It is a long road to get to that point. Then after you’ve moved in have a broad based, all hands celebration with your team and clients. Let your marketing folks have a fun time with it. By that time you will have really earned a party.

Kevin Grossman provides commercial brokerage and project services to businesses leasing or buying business space. He’s assisted firms with transactions involving over 3 million square feet of space from Eugene to Bellingham from his office in the Seattle area.


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