The lease negotiation has the potential to provide several, lucrative concessions and rights for the tenant, as long as they are requested and properly defined. What most tenants don’t realize is that most landlord’s are sitting on a pile of money that is available to be allocated towards the incoming tenant in the form of lower rent, free rent, tenant improvement dollars or a combination of the aforementioned concessions. How that money is distributed is determined by the terms stipulated in the lease.
Many believe stronger financials will equate to a more expensive deal. However, the lease revolves around the landlord’s risk of the tenant. A company with a strong financial history represents less risk, which means the landlord will offer better terms to entice the potential tenant. The lease negotiation process is similar to how a bank assigns a loan- the terms are based on the amount of risk. Since the landlord is investing in the tenant, the landlord will often spend money upfront to secure a tenant with the highest probability that they’ll pay rent throughout the entirety of the lease. (If a business goes bankrupt mid-lease, the landlord has the potential to lose a significant amount of money.)
Where many inexperienced commercial real estate negotiators miss opportunities in the lease is by not building in provisions for flexibility. This becomes a critical factor for rapidly growing businesses that often take on far more space than necessary to account for projected growth. While it is smart to plan ahead, at Tenant Advisory Group, we recommend you take on the space you need today with a moderate amount of excess room for planned growth. The reason being is that the office is often the second largest expense of a company. Paying for space that is not being used will unnecessarily burden the financial statements and inhibit a business’ ability to grow. Building in flexibility through rights of first refusal or rights of first offer is a far more effective and economical way to foster a company’s growth. Rights of first refusal and rights of first offer create the opportunity for a business to expand at a future time, if and when necessary.
An extremely valuable piece of negotiation leverage is the right to terminate. This assures a growing business can leave a small space, and move into a larger one when the timing is right. How it works is it provides an opportunity to renegotiate the lease while setting a cap on the rental rate. It can extend the terms of the lease to keep the rent lower than the market rates, and if the market prices drop, you can leverage it to lower rent. Another great piece of leverage is the right to renew, though to be most effective it must stipulates cap on how high the rental rate will be at renewal. Similar to the right to terminate, it allows the company to renegotiate the rent down and prohibits the landlord from renegotiating the terms back in their favor.
In order to obtain the largest concession package, demonstrate strong financial security; request a right of first refusal and/or right of first offer, a right to renew and the right to terminate. When combined, these facets of the lease will significantly improve the quality of life for a business while reducing the strain on the company’s financials.
When building your office floor plan, it’s always better to have more room than not enough space. Packing people into an office lowers employee satisfaction and can lead to a counterproductive work environment, which may negate any money you save in rent. By offering your staff more free-space and a comfortable office, not only will you leave room for growth, but morale will maintain a healthy level, leading to a happier and more efficient business.
The structure of an office plays many roles from safety (overcrowded spaces can block exits) and employee happiness to an effective recruitment tool. For example, the open office design has become popular among employers and employees in recent years. Originally, the idea was that it promotes collaboration and enhances the energy of the office. However, the reality of this layout is that only a small subset of businesses benefit from it. Oftentimes, this style of office layout amplifies the negative effects of overcrowding, as finding a quiet moment to compose emails, reports or make phone calls can be a challenge. A poorly strategized, overcrowded work environment can have a direct effect on the productivity of a business.
Less Productive Employees
Employees are the lifeblood of any business, and their productivity is directly tied to their happiness. Smaller, packed offices have a negative impact on the mental and physical health of employees. Not only are environmental stressors increased by the higher noise levels and reduced concentration, but funneling employees into a compact space can also increase the risk of communicable illnesses. (This means colds can incapacitate more of your workforce). Additionally, more workplace conflicts can arise from the frustration of a packed, loud environment. More sick days, frustrated workers and a lack of privacy all lead to a decline in employee happiness and productivity.
Prepare for the Future
A strong business model considers the future growth of a company. In order to avoid overcrowding an office, search for an office space that accounts for reasonable projected growth. Oftentimes, an extra ten or twenty percent of office space can prevent a lot of issues from arising. While it may seem like an unnecessary expense, it has the potential to provide greater returns in the future by avoiding terminated lease fees, increasing the lifespan of office equipment and better lease terms that come with a longer lease duration. Not only that, but a company that places its employees first with a comfortable work environment will attract more top talent.
Properly building your office for its current population plus future growth will offer many long-term benefits to your business. Increased productivity, safe workspaces and a boost in employee morale all stem from providing employees with a comfortable workspace. Speak with a professional broker when searching for a new office, as they will be able to offer valuable advice that can contribute towards the success of your business.
Relocating your company to a new office space is an exciting time, full of endless possibilities. Such a large undertaking will of course create stress, but proper planning in advance will save you and your business time, money and hassle.
Tenant Advisory Group has helped hundreds of companies grow their business in a new space. See below for key tips we provide our valued clients.
Build Your Team
A company relocation has too many moving parts for one person to handle. It’s important to have a solid team in place to keep track of every detail. Here are a few of your key players:
- Involve your moving company in the planning process as early as possible to get the best estimate on your relocation timeline. Contact your furniture vendor and/or partner with an interior designer to plan the look and layout of your new space.
- Have an in-house or on-hand technical expert who can spearhead setting up and migrating your phone and data systems.
- Designate at least one employee as the Move Captain. This person will communicate clearly with staff regarding packing procedures, as well as what to expect in the new location.
Take or Toss
Starting fresh in a new office presents the opportunity to shed items you may not have use for anymore.
- Before making any decisions, prepare a complete inventory of everything in your office — from the conference tables to paperclips.
- Comb through sensitive items such as bank statements, contracts, invoices, client information, etc. Either pack items in secure filing boxes or arrange for a shredding service to take them away.
- Get rid of unwanted electronics, computer equipment and furniture by either recycling or donation. Make sure to gather the necessary paperwork for potential tax write-offs.
Spread the Word
Let your entire network (clients, vendors, professional organizations, etc.) know that your company has a new space and address.
- Make a list of your current clients and vendors, and notify everyone of your change of address to avoid any hiccups in business or productivity.
- Prepare and order new stationery, business cards and envelopes to reflect your new location.
- Contact the post office to have all mail forwarded to your new address.
For questions about how Tenant Advisory Group can make your Chicago relocation as seamless as possible, contact us today.
From founding a company to raising money to launching a new product. Each stage of an entrepreneur’s journey is crucial – and certainly at every stage of growth. It’s not always talked about but short of what you pay your employees, office space is often a startup’s largest fixed expense. Finding the right office space can even dramatically affect the business’ bottom line.
A startup’s office space is more than drywall and hardwood floors. For any startup, the physical office space embodies the company’s beliefs and ideas. It stands for what the business represents, and in many cases it serves as a second home for its employees.
Even if you’ve had experience with leasing or buying property, finding the right space to fit your business can be an overwhelming process. While time is always of the essence for most startups, you have to take a calculated quick approach when it comes to real estate – otherwise you may end up burning through critical funds.
Here are few things an entrepreneur should consider:
The struggle for most startups is to find a space that is easy to access for employees and will help in retaining and attracting talent. If you’re in this position, don’t be seduced by low rents and spaces that are readily available outside of central business areas. Watch out for landlord-driven “move in ready” packages that have pre-installed Internet, phone and furnishings. These places often charge higher rents that traditional spaces. Instead, focus your search on finding spaces in close proximity to city-centers. The vibrant and dense population means you can attract young talent, be close to banks and financial institutions, less wasted time traveling between meetings and creates an environment that breeds partnerships and ideas.
Most startups make decisions based on incomplete information or lack of strategic planning. Know your people and the direction you want to take the business. Picture how the space will support that culture and vision. Then engage a design professional to work with you on putting those ideas into a firm plan.
Working with an Advisor
Especially if you’re inexperienced in this area, choosing a space on your own is risky. Without proper guidance, companies can easily overspend on their lease rates. Even more disappointing, they’ll end up with a space that doesn’t fit their needs. Always work with an experienced broker or agent in your area. You can see the difference we had in work with a client – telling the story about how we were not first in line but got our client into the driver’s seat.
The commercial real estate market is on the upswing and deal activity is soaring! Today, there are hundreds of thousands of investment properties for sale or lease. Unfortunately, a large number of those properties are represented by folks who are inexperienced, or worse, lazy. Whether you’re looking to sell or make a purchase, or to protect yourself, your money and your future investment, here are 3 easy ways you can spot a sloppy seller in seconds.
1. Unflattering photos
Probably the most obvious tip of spotting a sloppy seller, is taking a look to see if the property available is also sloppy. This includes photos of a space that’s unkempt (grounds are trashed, rooms unfinished, garbage shown in photos). Keep in mind, we’re in the golden age of social sharing, with millions of people browsing sites like Houzz.com, Instagram and Pinterest. While we all know the 8 megapixels on our iPhone 6 phones are no slouch, you don’t want your representative (or an agent who represents a property you’re interested in) to take photos of the space using just their cell phone. So if you spot a property that shows grainy and dark photos, chances are you’re going to skim right past the listing. Making a property look nice is real estate 101. You want to entice people to buy it, and all of this above indicates the seller might not be so savvy.
2. Unsettled energy
We’re in an exciting time – the real estate market is moving at a fast pace and the energy is buzzing. However, if you ever get the feeling that someone is just “checked out” of the process, it’s a good indication that the seller is in a hurry to get a property off their hands. They might be willing to accept an offer that’s a lower price than expected. Or, they might even skimp out on having a space properly inspected – leaving you the buyer – stuck with potentially thousands of dollars of repairs.
3. Unskilled reputation or lack of reputation
Excited at the idea of adding a win in their column, an inexperienced agent may encourage a seller to accept any offer rather than risk losing the deal. Additionally, agents who are unfamiliar with real estate in the area may make moves that unknowingly hurt their clients. Reputation is key in this business, so don’t be afraid to ask around and confirm a seller’s reputation.
Whether you’re an agent or someone who’s making a purchase, do your best to avoid taking on the 3 bad habits above. Instead, here’s a handy guide of the 7 habits of today’s successful commercial real estate agents. With any professional investment, plan ahead, do your research, keep abreast of the latest trends, and you’ll be able to play the commercial real estate investment game like a pro. If you’re looking to buy or sell space, first and foremost, always seek the help of a trusted advisor or broker in your area.
Renting or buying commercial property is a major move. Like it or not, mini-panic attacks or sleepless nights are part of the process, and every potential tenant will have fears and doubts – especially early on.
The good news is that you can avoid many common worries in the first place, when you do a line-by-line review of the lease. Sure, reading a commercial lease can be difficult and time-consuming, but the consequences of not reading it can be infinitely more unpleasant.
If worry and fear are keeping you up all night, here are 13 common doubts and how you can resolve them during the lease negotiation process:
- Signing the wrong type of lease. If you hear the term “standard business lease” you should know there isn’t such a thing. Many landlords and even some inexperienced attorneys will tell you otherwise, but always know leases are negotiable clause by clause.
- Not getting feedback or input from your employees on your space. It’s not like you’re the only one working in your new space. Take surveys from your staff and learn what’s valuable to them as well as your business.
- You won’t get the perfect space. Being attached to any one property puts you at a major disadvantage. Don’t get stuck on the idea that one space will determine the success of your business. Bottom line: You want to be where your clients are – make sure the location is convenient over sexy.
- Not speaking your mind. Ultimately it’s your business. Don’t be afraid to speak up if you feel you aren’t being heard.
- Not having the right help for your business. Choose a real estate broker or advisor who’s very experienced in commercial lease negotiations. Also, check references with other business owners, for specific feedback around lease negotiations.
- Rejecting a good offer out of emotion. Lease negotiation is a two-way street. Hear something you don’t like? Stay calm, take a deep breath before reacting. You should never reject a deal out of anger.
- Relying on the landlord’s word on what is (or isn’t) permitted. Get permission from the city or township zoning officer before entering lease negotiations. Your landlord may really believe what he tells you, but he’s not the one who makes that decision.
- Negotiating in “panic mode.” It’s so important to keep a level head whenever you’re negotiating. You have to keep an open mind and know that there are always creative options for any circumstance you’re in.
- Failing to “get it in writing”. Always get everything discussed away from the negotiation table in writing. Find a way to document in-person conversations with the landlord. Never agree to anything unless it’s written down.
- Signing a long-term lease without reasonable upgrades. It’s no surprise that most landlords prefer that commercial tenants sign long-term (think 5 to 10 year long leases). It might be surprising, however, to know that you are able to ask for certain items in relation to the length of the lease, such as free rent for a period of time and/or an upgrade at the landlord’s expense.
- Not getting an “out” clause built into the lease. At the very least, you need an “option to sublease” and an “option to sell the business and assign.” Having a tenant rep by your side can help you determine what are reasonable requests.
- Not securing financial documents. Securing all bank statements and financial documents well ahead of time, before the lease negotiations, will help you out tremendously. You’ll know your budget and have that figure in your back pocket for any leverage, if it’s needed. Schedule time with your accountant, your loan officer, etc. to help get these documents in order.
- Trying to do everything on your own. Not getting professional help will put you at a major disadvantage. Seek the help of a trusted advisor in your area, who is experienced at lease negotiations, and who has the interests of your business at heart.
If any – or all – of these fears sound familiar, don’t fret. When you do your research and have the best support from a trusted advisor, you’ll be successful in getting the lease that’s right for you and your business. If you’re heading to the negotiation table soon, be sure to check out these 6 tips for getting a smooth real estate transaction.
At Tenant Advisory Group, negotiations are a part of everyday life. Last week, we gave 5 tips for successful negotiators. We have 5 more tips for a successful negotiation. Tips 6 through 10 focus on understanding the other side of the negotiation process.
6. Understand your Motivations – It is important to not lose sight of what you set out to accomplish. Many factors can play a role in working against you like ego, spite, saving face or revenge. By remembering the true purpose of the negotiation, it can revert your focus back on what you are seeking to achieve and not wasting time and energy on things that distract you from your purpose.
7. Never Make a Threat you are not Willing to Keep – You will lose tremendous credibility and leverage by not following through on your threats. If you need to make a threat, you have to be willing to act on it, should your adversary not comply with your demands. Any sort of threat, large or small, should be a last resort in an argument and can only be utilized if leverage will shift immensely in your direction.
8. Listen – This can be a tremendously effective negotiation tool. By asking questions and listening, you can gain great insight as to your challenger’ motivations, you can gain valuable information that will increase your leverage or you may just learn something personal that you connect over. Either way, we have two ears and one mouth”… use them in the that same proportion.
9. Know your BATNA – This is your Best Alternative to No Agreement. Just because you are in negotiations does not mean you have to accept something that does not make sense. Having an alternative that you can fall back on provides tremendous leverage and ensures you will not do a deal just for the sake of getting something done.
10. Develop Trust – Everyone always prefers to work with people they can trust. This holds true with people you are negotiating against. It bodes well for future successes and better results in your discussions.
Check out 5 Tips for a Strong Negotiator: Part 1
Unless you work for a brokerage firm, you are not an expert when it comes to commercial real estate leases. Leave it to the experts when it comes time to negotiate your lease.
Often times, a landlord will be more willing to discuss a better deal to the tenant based on the simple fact that they are working with a broker. A broker’s mere presence shows the landlord that the tenant is serious about a competitive offer. The key to a successful contract negotiation is competition. A broker will ensure that the tenant has their needs met and help them to lock down the best deal possible.
A broker has the time and resources to investigate and negotiate on behalf of the tenant. For someone without the resources of an experienced broker, these negotiations can be very time consuming. During a lease negotiation, a broker would be able to bring five important services to the table on behalf of their tenant.
- Investigate the economic market to grab the best deal for a tenant
- Create a competitive bidding environment between a landlord and a tenant
- Handle the paperwork and transactions involved in a negotiation
- Serve as a representative on behalf of a tenant’s legal rights
- Analyze the needs of a tenant and investigate all properties suitable for those needs
Throughout 2014 there have been many examples of a drastic escalation in the valuation of land within the confines of the City of Chicago. Since much of this land is being developed for the purpose of condominiums and apartments, developers may find it more attractive to shift their focus to surrounding neighborhoods. These value oriented investors and developers will begin to move further and further away from the heart of the city in an effort to find less expensive land and redevelopment options.
This ever-evolving landscape could lead to a new atmosphere in and around the city as the cities neighborhoods begin to have more of an office space offering. However, some employers are realizing that this is not such a bad thing. As businesses relocate out of the heart of the city, they are moving closer to employees. The feeling is that this will attract more employees by bringing the job closer to the talent pool.
The net result of all of this for the larger community will be a neighborhood scene with many mixed use and other developments. These will likely contain a larger and larger portion of office space, as the trend continues. All of this may not become obvious to the casual observer even by the end of next year. However, as this trend persists, the landscape of Chicago’ commercial real estate appears to be shifting.
Click here to learn more about the skyrocketing prices of land in the city.