How To Negotiate An Office Lease For Your Company Or Startup
By Gregg Jackowitz, Managing Director, Bond Collective
When it comes to an office lease, the old real-estate adage applies: you don’t always get what you deserve, but you do get what you negotiate.
Finding and securing suitable office space for your company or startup is one of the most daunting challenges you’ll face as a business owner. Signing a contract for a five-year lease is more stressful even than finding investors, estimating market size, or setting up a cap table.
The terms and rate you settle on can have a profound impact on your bottom line — and the ultimate success of your business — for years to come. That’s why it’s vital to get it right the first time.
In this article, we’ll show you the best way to negotiate an office lease so that both you and your landlord are happy.
How To Negotiate An Office Lease
1) Eliminate The Need
The first step to negotiating an office lease is to eliminate your need. If a landlord senses that your back is up against a wall and you’re desperate to find office space right away, the ball is in his court. He now has more leverage to get the terms he wants.
Play the game your way by using a coworking space like Bond Collective to your advantage. With coworking space, you can rent anything from desk space to large offices and conference rooms. You also get lightning-fast internet and other infrastructure necessities that you might have to pay for yourself when you sign an office lease.
By setting up your company or startup in a coworking space before entering into a lease negotiation, you remove the feeling that you have to strike a deal as soon as possible or you’ll be out in the street. That puts the ball firmly in your court and gives you the leverage to get what you need.
And once you experience the benefits of coworking space, you may decide to save money, time, and energy by staying there.
2) Consider Hiring A Tenant Broker
As the name suggests, a tenant broker works with your business to get you the best terms and the best rates possible in your office lease. In essence, the tenant broker acts as your advocate during the negotiations.
They can also serve as a go-between and do much of the time-consuming legwork involved in hammering out the final details. Additionally, a good tenant broker can:
Educate you on current market conditions
Arrange and accompany you on tours
Prepare letters of intent
Just as a real estate agent simplifies buying a house, a tenant broker simplifies finding and securing an office lease that is just right for your business. However, it’s important to keep in mind that you may be responsible for commissions or other fees when working with a tenant broker.
3) Focus On The Total Value
Don’t get fixated on negotiating the lowest monthly rent possible. Instead, focus on the total value (real total cost) of the office lease.
Here are three simple formulas to help you analyze the deal and determine the real total cost.
Annual Cost = Annual Rent + Annual Rent Increases + Taxes
Adjusted Total Cost = Annual Cost x Lease Length
Real Total Cost = Adjusted Total Cost - Free Rent - Tenant Improvement Capital
Armed with this information, you’ll be able to level the playing field and figure out a way to get the best office lease possible.
4) Don’t Show Your Excitement
When negotiating an office lease, it’s always a good idea to play your cards close to the vest. At its most basic, that means that you don’t show how much you like the space. So even if you absolutely love the space and can see exactly where your office would go, play it cool.
If the landlord knows you want what he has to offer, he’ll be more likely to press for terms, rates, and other details that benefit him more than you.
A great way to keep your emotions in check is to secure a “safety net” of sorts. The net, in this case, is a coworking space like Bond Collective. We touched on this in the Eliminate The Need section above, but it works here as well.
Having an attractive coworking space that supplies everything you need while keeping your overhead low can add perspective (not to mention less of an emotional “got-to-have-it” reaction) to your office-lease shopping.
5) Pay Attention To The Lease Terms
The rate is the dollar amount on the office lease you’ll be paying every month. And while it is a critical variable, it’s not the only one (or even the most important one) in the equation.
The terms of the lease — the fixed, non-cancelable period for which the office lease agreement is in force — can actually have a bigger impact on your bottom line than winning a five-percent discount on the rental rate.
Take some time to investigate all the angles and all the long-term ramifications of the terms of your office lease before you get too far into the process. That way, you’ll know exactly where to focus your negotiations so you can win the best office lease possible.
6) Hire A Lawyer To Review The Lease
While tenant brokers have experience negotiating office leases, acting as your advocate, and taking care of all the paperwork, they are still paid on commission. That means they have a vested interest in the value of the final contract.
Take steps to make sure you’re receiving a fair deal. Hiring an unbiased third party — like a real estate lawyer — to review the details of your office lease provides much-needed security and ensures that neither the landlord nor the tenant broker is taking advantage of you.
7) Plan For A Possible Exit
Even before you begin negotiating an office lease, come to terms with the fact that your business isn’t going to be in this space forever. Your startup may fail. Or it may grow and need to expand to a new location. Either way, plan these exits into your final agreement.
Perhaps you agree to a slightly higher rate in order to secure a shorter term with the option to extend. Perhaps you agree to pay a fraction of the rate until a new tenant moves in after you leave.
If you’re unsure what items to include in your office lease, talk to a tenant broker or a real estate attorney.
8) Avoid These Lease Provisions
Negotiating an office lease is all about getting the best for your business. Unfortunately, the landlord approaches negotiations in the same way.
Because of that, he will push for the contract to benefit his business. To do that, he’s going to include stipulations that favor his interests instead of yours. Keep your eyes open during negotiations and avoid provisions like:
Unlimited increases in operating costs, property taxes, repairs, and insurance
Leasing the property “as is”
Disclaiming responsibility for environmental and access issues
Requiring you to pay tax increases that result from the sale of the property
Reserving the right to terminate the office lease at his convenience
Prohibiting the possibility of subletting
Insisting on a personal guarantee from the shareholders of your business
Preventing these provisions from finding their way into your office lease will keep the contract equitable for both sides.
9) Use Data To Drive Your Decision
Commercial real estate is not as transparent as residential real estate, but information on office space is available if you’re willing to research. Tenant brokers can usually give you a general idea about the deals struck in and around the area in which you’re looking. You can also inquire of business associates or search the internet for details.
This data acts as an excellent starting point on which you can base your negotiations. If you know what someone else is paying (and for how long) in a similar location, you’ll know how hard to push to get a favorable deal.
10) Negotiate With Your Needs In Mind
Every business has unique needs. So don’t be afraid to get creative when it comes to negotiating your office lease. Structure the deal in a way that gets you what you want while still giving the landlord what he wants.
Maybe that’s a lower rate for the first year followed by a higher rate for the next two years. Or maybe it’s paying $2 more per square foot so that you don’t have to pay out-of-pocket for renovations.
So identify exactly what you need — and what you’re willing to let go — and then negotiate from that position of strength.
Do Your Homework
Even before you contact your first landlord, do your homework. Use whatever resources you have at hand to answer questions like:
Are other businesses interested in the same space?
Has the space been vacant for a long time?
What is the neighborhood like?
What’s the parking or public transportation like?
When you have all the facts about a particular property, you’ll be better able to negotiate an office lease that’s beneficial for your business.