Up-and-coming areas can be a scary concept for some business owners. One day you’re paying low rent in a semi-popular part of town, then a few years pass and the area is booming, people and other businesses are flocking over and rent is skyrocketing. However, you don’t have to pay a fortune in rent or change locations if you take the right precautions. Here’s how you can hold onto your prime real estate at a fair rate.
Stipulate a Rental Rate
When negotiating the renewal clause in a lease, oftentimes there is a fair market value clause that leaves negotiation of rental rates open for when an area grows in popularity. But fair market value leaves too much freedom for the landlord to hike up the rates to match the new standard, which could end up being well above your budget. One benefit to using a good broker is that they know to negotiate for a specific rental rate based upon a finite escalation instead of relying on a fair market value agreement. This ensures that the you can afford the future rental rates and also reflects the increase of growth in the area.
Negotiate a Right to Terminate
The termination option is also an extremely valuable piece of negotiation leverage. A landlord will not offer this unsolicited. For leases longer than five years, it is very helpful to have a termination right. By negotiating this into the lease, should rates dip below market value, then you will be able to exercise the right to terminate and move or use this as leverage to reduce your rate. Conversely, if rents have skyrocketed, you can utilize the leverage of the termination right to extend your lease and keep your rates below market for the foreseeable future.
Sublease Your Space
Another option you can consider when the rent goes up is to sublease. As always, any business leasing a space should work with a broker to ensure that a sublease clause is included in the lease. From there, if the ability to sublease is allowed, you can move elsewhere to pay a lower rate while subleasing your original space to help offset the overall costs. This is especially beneficial if you are able to reduce your square footage as well.
Maintaining your presence in a popular area all comes down to your lease. Working with a reliable broker to negotiate the correct terms can take the stress out of rising market rates and give you peace of mind about staying in your space.
Relocating and choosing a new office space is a lot of work, no matter the size of your company. However, it also provides an exciting opportunity to start fresh in a new space. Carefully consider the following points to ensure you get the most out of your move.
Select a location that works for both clients and employees. You want a space which clients can find easily and employees can comfortably commute to – perhaps close to public transportation or with a parking lot if many clients and employees will drive to reach you. Consider where your key employees live and whether the space is convenient for them.
Find a space that doesn’t stretch your finances too thin. Make sure to calculate the full cost of the space and consider any hidden costs carefully to make sure nothing sneaks up on you (parking, utilities, any necessary construction, taxes, phone & data set up, janitorial, new furniture, etc).
Look for a space that will allow room for growth. Opt for a space that could potentially accommodate a growing team or evolve with your business. Also, check that any new space has sufficient area to allow for breaks and group or client meetings.
As you evaluate your options, look for a space with easy-to-use and secure IT systems, particularly if you need a reliable internet connection for your business to function properly. Understand and test the current technological infrastructure of each space you consider to ensure it can accommodate your business needs or if a potentially expensive build-out may be required.
Think about what amenities you’d like your new space to offer employees. Sunshine can be a great easy perk as access to natural light can affect mood, energy levels and alertness. See if your new location has space for a stocked beverage center or coffee bar. Also, consider investing in employees’ health with an on-site fitness center or dedicated wellness room.
Where you work matters. That’s why we’ve partnered with an online software platform to make it easy to search for spaces that are specific to your needs. All you need to do is enter your information here, and you will be given access to a database of office space listings complete with virtual tours, floor plans and all-in monthly prices. Finding the space of your dreams is only aclick away.
Before signing a lease, you want to make sure you are happy with the terms for the entire lease duration. To do this, you must understand the internal pieces of a lease so you can negotiate favorable terms with the landlord.
- Right to Terminate: This section of the contract describes what will happen if the contract is ended early or defaulted on, and describes the conditions for termination. Either party has the right to terminate the lease for a variety of reasons. However, one source of power you can ask for is a break clause which permits the tenant to terminate the lease without being obligated to pay the remaining rent balance should there be a timely notification of the intent to leave. This can be a great source of leverage to restructure a lease regardless of how the market has changed since the inception of the lease.
- Surrender of Premises: A surrender of premises clause stipulates the conditions of how the premises should be returned to the landlord and what procedures to follow when the lease ends. The clause outlines the tenant’s obligations, the landlord’s rights and what happens to any property left behind. It is acceptable to negotiate for the space to be returned in broom clean condition, and nothing more. The landlord may ask for space to be returned to white box condition, but that is too much to ask.
- Gross Lease: A gross lease is a type of commercial lease where the landlord pays for the building’s property taxes, insurance and maintenance. The gross lease can be modified to meet the needs of a particular building’s tenants, and a gross lease may require a tenant to pay utility bills. It’s important to make sure capital improvements are not passed along to tenants through operating expenses. When negotiating a gross lease, the tenant should ask which janitorial services are provided, and how often they are offered. The benefit of a gross lease is the convenience for the tenant to forecast a static expense.
- Insurance requirement: The insurance requirement of a lease defines the lease provisions of specific insurance coverages, indemnity, restoration, self-insurance and subrogation. What makes this negotiation difficult is the ever-changing terminology and coverages of insurance. It is recommended that you have a qualified insurance broker review the coverage requirements.
- Damage or Destruction Clause: A damage or destruction clause in a lease agreement outlines the rights and obligations of the parties to the lease in the event that the leased premises are damaged or destroyed during the term of the lease. Seek to minimize the time in which the lease can be terminated, and maximize the remedies available for the tenant.
Understanding the different terms, clauses and definitions of a lease is half the battle of negotiating a favorable lease. Make it as easy as possible to weave your way to a tenant-friendly lease by knowing the different pieces of a lease to even the playing field.
The best way to navigate the tricky landscape of a lease is to stay current on all the common phrases, clauses and definitions. You may have a general understanding of the terms, but it takes a professional to really navigate the ins and outs. Here are a few of the most common points you may encounter in your Chicago office space search.
- Letter of Intent: The purpose of the letter of intent is for both parties to come to agreement on various terms before spending significant resources and legal fees in pursuing an acquisition. Double check the business terms agreed upon in the Letter of Intent are the same as those outlined in the lease document. You’ll want to make sure you receive everything that was promised.
- Sublease Clause: A sublease clause outlines the terms for when you transfer all or part of your lease to another tenant while you remain on the property. When negotiating a sublease, reasonable consent should not be withheld by the landlord. The landlord will also ask for 100% of profits, but a 50/50 split is fair. Try to minimize the notice you must give, as well as the response time from your landlord to allow you more flexibility. Consent isn’t always necessary.
- Holdover Clause: A holdover occurs when a tenant continues to remain in possession of the leased property after the lease expires or terminates. The holdover clause specifies if a holdover can occur and at what rent. Landlords will ask for 200% of your monthly rent; however, 150% is the market standard. The clause itself should make clear that the tenant is not holding over unless they’re staying after the term ends without notifying the landlord and gaining permission. When negotiating the holdover clause, there are a few items you will want to have clearly stated in the lease: length of the lease; termination of lease; rent amount; and liability for damages.
- Renewal Clause: A renewal clause will attempt to automatically renew your lease unless you submit a notice. This clause is something you need to know about as a landlord may ask for automatic renewal without having to give you notice. It’s nice to have the rights to a space, but it is also nice to have the freedom to move. If you plan on staying, negotiating for renewal is a great opportunity for you to negotiate for a new rent rate.
- Work Letter: The work letter is an addition to a lease outlining the stipulations for all improvement work done by the landlord, and what work will be completed by the tenant at their own expense. This should be monitored closely to make sure everything matches up with what the landlord promised. If there is an allowance, base building items should be taken care of by the landlord, and if the landlord has ongoing construction, make sure the landlord is liable if improvements aren’t completed by the agreed upon date.
Negotiating a lease is the most crucial step when moving into a new building, and can potentially save you a significant amount of money. Armed with the new knowledge of these phrases, words and definitions, you’ll be ready to tackle any upcoming lease negotiation.
5 Reasons a Good Commercial Real Estate Broker Adds Tremendous Value
Choosing the right office space is one of the most important steps a small business owner can take, which is why it’s crucial to have an expert commercial real estate (CRE) broker with local ties to guide you through the process. Not only will a CRE professional handle every detail of the transaction, they also provide invaluable insights, connections and business support that will ultimately benefit both your top and bottom line.
Access to a Bigger, Better Market
In a city as big as Chicago, there are literally tens of thousands of places your business could call home. Active brokers make it part of their job to be in constant communication with local owners, developers and investors providing them with knowledge of both on- and off-market opportunities. They are your guide to locating the right space for you, opening up infinitely more possibilities for your business.
Realistic Views of the Space
Commercial brokers work hand-in-hand with the best real estate service providers – architects, contractors, interior designers, etc. – to provide a complete picture of space capabilities and potential costs. Can a 100-year-old converted warehouse handle a gut renovation? What are the sign requirements in a specific ward? Is it worth it to put in new windows? An experienced broker will be able to get the answers.
More Affordable Monthly Payments
Everything is negotiable (from tenant improvements to rent credits and even access to first-class amenities) if you know the right way to ask. A CRE professional tuned into the local market will know the moves to ensure you are getting the most out of your monthly payments.
A Better Understanding of Your Contract
As a business owner, it’s imperative that you have a thorough understanding of a document before you sign it — how can you be expected to comprehend the industry specific terms and legalese that fill a commercial lease? Chicago CRE brokers live and breathe this language every day, creating much-needed guides in these complicated transactions. In fact, Tenant Advisory Group negotiates around 40 transactions per year, working with approximately four to six different properties for each deal!
Support Beyond the Lease
CRE brokers work with dozens of professionals across a variety of industries on a daily basis, carefully curating a network of trusted individuals. A close relationship with your broker can provide you access to the top attorneys, accountants, bankers, insurance brokers, financial advisors, web designers and IT companies in Chicago.
For more information about how Tenant Advisory Group can be your partner in all of your commercial real estate needs, click here.
Bowtruss Coffee, Portillo’s Hot Dogs, even Bernie Sanders. Between businesses and notable politicians, it seems as if everyone is flocking to Chicago’s South Loop neighborhood and setting up shop.
In the late “˜90’s, industrial speculation drove the South Loop’s real estate market. Today, it’s no doubt becoming one of Chicago’s hottest multi-family, commercial and retail markets. We’ll even say it’s on its way to become the next River West or Fulton Market hot-spot, and here’s why:
Students: Chicago is a bustling vibrant city, and it’s easy to overlook the impact of college students in the Loop area. Downtown, alone, is home to over 38,000 full-time college students, and there’s been a corresponding rise in student housing development and sales in recent years.
Surge in multi-family population: Zillow predicts the South Loop will be Chicago’s second “hottest” neighborhood in 2016. With downtown, lakefront, Museum Campus, Grant Park and Columbia College all within walking distance, the South Loop makes an ideal location for anyone looking be near it all. And, as professionals from the Loop look to work and play close to home, developers are rushing to fill this need for more housing. If you’re in the business of recruiting or hiring temporary talent, being located near colleges is perfect for your industry.
Transit and retail development: With the area’s growing residential population, there comes a surge in transit and retail development. Several bus lines run through the area that’ll easily connect you to all areas of the city. Not to mention, the number of El and Metra train stations nearby. With so many transit options, people living in the neighborhood will have an easy time commuting into downtown or any of the outlying neighborhoods like the West Loop, Lakeview, Fulton Market.
Neighborhood shopping and dining is also flourishing. The shops at the Roosevelt Collection seem to grow day by day. Take for example, when the Roosevelt Collection was sold to Prudential for $222M last August, it was already 93% leased with retailers such as Victoria’s Secret, Container Store, Banana Republic and a 16-screen Kerasotes multiplex. It probably goes without saying, but having access to so many restaurants in the area gives businesses and their employees plenty of options for networking lunches and business-related entertaining.
The South Loop market shows no signs of slowing as there’s just so much redevelopment and new developments heading to the area. And one of the best parts to this, is that in the meantime, there are still wonderful lease deals to be had at very affordable prices compared to the very tight markets of River North or River West! The key to finding them is to work with an experienced advisor in the area. Working with a broker or agent who knows the ins and outs of a city, will have access to many of the best hidden deals.
Lastly, working with an advisor means you can be sure you’re getting the best and fair price, and terms for your business – most important when it comes to finding spaces in these “hotter” markets. Keep this in mind as you consider your next move in the Chicago market.