Understanding Your Commercial Lease Agreement | Space Planning and the Early Stage Commercial Leasing Process
To get the best deal, have your space meet your needs, and be in the best position to move seamlessly through the commercial leasing process, it is important to plan your commercial space. Today’s post highlights some of those key early stage considerations that will help you optimize the space planning process for your business.
Identify Your Ideal Space
The first step to take once you’ve decided that you’re ready to lease a commercial space is to identify what you type of space you’re looking to lease. A good place to start is to identify the specific use for the space and what space characteristics are required for your business. Make a list of those characteristics that are critical, a list of those that are important but not critical, and a list of those that would be nice to have. These lists will be very valuable when meeting with your broker and helping to narrow down the list of available spaces.
Next, identify the square footage requirements for your particular space. How many employees will work out of the space? What type of set-up do these employees need to be successful (i.e. how many square feet do you need per employee)? What “non-employee” areas do you need to be successful (e.g. utility room, kitchen, server room, etc.), and how much space do you anticipate you will need for those areas? Get a ballpark figure to share with your broker, and ask for feedback on what size space makes sense for your business.
Remember that lease terms aren’t generally shorter than three years, and are often much longer, so you should consider what your business will need in the future. If you anticipate later growth, you should consult with your broker about finding spaces with room to grow, and/or with adjacent space leases that expire around the time you expect growth. (If a space is expected to become available, you may be able to negotiate for the right to make the first offer for that space when it comes back on the market.)
Depending on the expertise of your employees and the nature of the lease, it may make sense to work with a space planning consultant to help you identify the best layout for your commercial space. Many brokerage firms have space planning consultants they can recommend (and some keep them in-house).
Do Your Due Diligence
It is important to understand the particular requirements of your space before starting negotiations with potential landlords. It is already very difficult to compare spaces directly, since no two spaces are alike, so you want identify as many variables as you can early on (so you can more easily compare the various spaces). A few key things to consider:
- What is the age of the building? Many leases require you to pay maintenance costs directly (and all require it indirectly), and maintenance costs are generally higher on older buildings. Older buildings may also require significant upgrades, including some upgrades that may be mandatory to get an occupancy permit that is necessary to move into the space. Knowing these “extra” costs will help you compare the prices of various spaces with more precision.
- Where is the building located? Buildings in certain locations may have additional costs associated with the location. For example, it is very likely that almost all buildings (and thus almost all leases) in downtown Seattle will soon be seeing a special assessment charge associated with the Waterfront project (called a “Local Improvement District” or LID). Other buildings may have certain association fees or other expenses associated with the particular location.
- Do I have special build-out, furniture, or similar requirements? Does your particular business have build-out requirements that may not be in every building? For example, some high occupancy or high risk spaces need particular fire safety systems. Your business may require on-site server rooms, which may require extra cooling capacity. Also, you may have certain furniture that would be much easier (and much less expensive) to move to the second floor rather than the 72nd floor if all else was equal (and you aren’t willing to pay for the views.) Another item to consider is interference with your wireless access. Certain spaces may not be ideally suited for strong wireless signals, which could be detrimental if your business is used to relying on a strong signal.
- Are there planned capital improvements to the building? While some landlords may not share this data willingly, you should inquire about the overall condition of certain capital items for the potential building, including HVAC systems, elevators, parking lots, and similar items. The cost of replacing these items are often passed through to the tenant, and you should have an understanding of where you fall in the useful life of these improvements to be able to properly negotiate these costs into (or out of) your lease. Some of this data is public record because Landlords must generally get permits for many of these items. It can also be a hassle for your business to deal with the Landlord closing a parking lot or replacing elevators during the term of your lease.
- Is the building professionally managed? You may end up paying a bit more for it, but professionally managed buildings often present better and come with less hassle when it comes to repairs and other building-related issues than buildings that are not professionally managed. This is a general rule, and there are definitely exceptions, but at least you should understand who you would be dealing with if you need help once you are in the space.
- Does the building have adequate parking? Parking can sometimes be mistaken as unimportant, but parking costs can be considerable and often aren’t included in the “list” price. Also, certain types of tenants may have fixed minimum parking requirements per code.
- How visible is the building, and is visibility truly important? Location is key, but some tenants make the mistake of conflating location with visibility. Access and cost are often more important than how big and visible your sign is or how close you are to the trending location. Consider how your location will be perceived by your customers, and spend the extra time (and money) looking at high visibility buildings only if it truly adds value.
While this list provides some insight into the key considerations, each business will have its own unique needs and should consider those needs from the very beginning of the commercial leasing process.
Get Your House in Order
Landlords are generally focused on finding the path of least resistance to a market rate lease with as little liability increase as possible (and preferably a decrease in potential liability). Therefore, landlords will often want to see certain financial statements early in the leasing process, particularly if your company is a startup. Landlords want to know that you have the ability to pay and that you are serious about the commercial leasing process. Prepare financial statements, including statements for owners, prepare or update your business plan (particularly if you are a startup), and ensure your corporate documentation is in order early in the process. Landlords love when they get this documentation promptly and in order, as it shows you are serious about your financial obligations. And how well you exchange this information is a proxy for evaluating the potential liability (and hassle) associated with having you as a tenant. That being said, don’t automatically disclose any information to the landlord without considering their need and whether the information should be subject to the protection of a non-disclosure agreement.
If you focus on planning for the commercial leasing process thoroughly early on, you will help ensure you get the best available space and have the information to negotiate with strength. Once you’ve identified your best available space, it is time to start the negotiation process. Stay tuned for the next post in the Understanding Your Commercial Agreement Lease series discussing the letter of intent.
If you’d like to learn more about the commercial leasing process or commercial lease agreements, please comment below or contact us.