This post was contributed to VENTUREAPP by Nell Gable, marketing manager at PivotDesk, a company that specializes in helping businesses — big and small — make smart real estate decisions by matching them with flexible office space solutions.
As a startup founder, it’s common to wear many hats as you get the business off the ground. But willingness to do the dirty work as a founder, doesn’t necessarily come with the expertise needed to be successful in every endeavor. Take office space for example. How many founders can call themselves experts at negotiating a commercial lease? Not many — so it’s important you do your homework vs. overspending on professional assistance and risking your business via a trial and error approach.
To be blunt, the world of commercial real estate is dog eat dog.
Office rent — in startup meccas like Silicon Valley, NYC’s own version, Silicon Alley, and Boston — is high and office space availability is low. Entrepreneurs seeking to set up shop in the coveted Midtown South area, for example, will see office space availability as low as 7.9 percent. And all of this competition for prime office locations has driven cost per square foot in Manhattan up to an all time high at $72.
So, if you’re feeling overwhelmed, you’re not alone. Navigating the commercial real estate industry is daunting even to the seasoned entrepreneur. And the challenge becomes even more frightening when you consider that the people holding the keys (literally) to your office space dreams (i.e. landlords) negotiate ironclad leases in their own best interests every single day.
So, what’s a startup founder who’s already juggling the stress of keeping their employees happy, raising money and oh yeah, growing their business, to do?
Stay calm, arm yourself with the knowledge you need to evaluate your actual need for office space, then seek backup. Yes, we’re talking about finding a broker you can trust, and no, that’s not an oxymoron.
To get you moving in the right direction to achieve CRE success — read: knowledge of the system — we’ve curated a set of key terms to get you started.
Once you’ve mastered the definitions below, your next step is to understand the secrets to working with a broker, managing landlords and negotiating leases here.
Your Office Type Options
Office Sharing: Shared office space was designed to alleviate businesses from the cost, commitment and risk associated with a traditional commercial real estate leases. Rather than signing on for a space of your own, you’re able to share space with another company. By utilizing a service like PivotDesk, you can book on a per seat basis and retain the flexibility to increase or decrease your team size without penalty.
Coworking Space: Coworking is a form of shared space where you join many businesses in one office. The difference between coworking and office sharing is that there is no host company that owns rights to the space. Instead, coworking companies like WeWork own the space but do not reside in it — leaving the floor plan open to a group of businesses who book space by the seat or office.
Virtual Office: Virtual office space allows you to set up a business presence, house remote employees or test a new market without committing to a long-term lease. You’ll have access to open and private floor plans with flexible terms so you can decide how big your space should be and how long you’d like to keep it. Popular virtual office providers like Regus tend to charge for most a-la-carte services such as use of conference rooms, copying and phone access.
Traditional Lease: A traditional commercial office space lease is a legally binding agreement between a landlord and a tenant. If you wish to rent office space, you will be required to negotiate and sign a lease. The contract will determine how items such as lease term, security deposits, subleasing, taxes and obligations for repair are handled. We’ll get into the different types of leases later on in the list.
The People Behind the CRE Deal
Landlord: A landlord is a person who owns a property which they rent out to tenants. It’s important to understand that the landlord is always seeking to protect their own interests. One of the ways commercial landlords do this is by creating a diverse portfolio of office space tenants, meaning a mix of stable companies such as legal and financial firms, as well as promising startup type companies. No matter how exciting your business idea is, chances are, the landlord won’t be impressed unless you are able to demonstrate a certain level of financial stability, which is why you need a skilled broker to negotiate on your behalf.
Tenant Representative: A tenant “rep” is a commercial real estate realtor that represents the tenant instead of the landlord. They help identify office space needs and negotiate with the landlord or landlord representative. Tenant reps earn their fee by splitting the commission with the leasing agent. They can also help resolve tenant-landlord disputes and serve as an intermediary for tenants. If you are new to the commercial real estate market, you’ll need someone on your side that can protect your interests and steer you towards the right NYC office space.
Landlord Representative: A landlord “rep” is the leasing agent. They represent the best interests of the owner or landlord and are responsible for obtaining the highest amount of rent with the least amount of expense and risk. A landlord representative is authorized to negotiate with the tenant or tenant representative on behalf of the landlord, to secure a rental agreement that details rental costs, security deposits, tenant improvement allowances and other concessions. They often have a lot of experience and will negotiate the best possible deal for the owner or landlord. If you don’t have a tenant representative and are not familiar with the typical real estate clauses and provisions that could affect you down the road, you may be at a serious disadvantage.
What You’re Paying For
Building Classifications: There are three classes of office buildings – A, B and C. Class A buildings are high-end office spaces that are new, well maintained high rises with quality amenities in prime locations. Landlords command premium rents in these office spaces. Class B buildings are average in nature with lesser amenities and tend to be no more than four stories tall. They may have once been Class A, but wear and tear downgraded their classification and lessened their market value. Class C buildings are usually more than twenty years old and in need of major repairs. Locations are less desirable and rents are much lower, but with renovation, they can be upgraded to Class B. It’s important to understand the classification of the building you are leasing to ensure that you aren’t overpaying for rent.
Usable Square Footage: Usable square footage (USF) is the actual space you can occupy in a commercial rental property. Non-exclusive spaces such as lobbies, restrooms, stairways, hallways and storage rooms are not included in USF. However, if you leased an entire floor, restrooms and hallways would be counted as usable square footage since it’s exclusive to your company. To calculate USF, subtract the shared square footage from the total floor area.
Rentable Square Footage: Rentable square footage (RSF) is the total usable square footage plus the shared spaces of the building. This includes the shared lobbies, hallways, restrooms and storage areas, which you pay for. To calculate RSF, you need to determine the “common area factor.” To do so, divide the total floor area by the usable square footage. On average, the common area factor ranges from 10-20 percent.
Common Area Maintenance: Common area maintenance (CAM) is a fee paid to the landlord in addition to rent to maintain your office space. There are two types of CAM fees – variable and flat. Fees are based on total rentable square footage and represents a pro-rata fee of the total maintenance charges for the building. These fees can include anything from insurance, repairs, landscaping, cleaning services, utilities, snow removal security costs, and more. Sometimes it can include administrative and management fees and salaries. CAM fees are calculated based on a percentage of the total costs so you will want to negotiate a cap on these fees and ensure that these fees are narrowly defined to control your costs.
Concessions: Commercial lease concessions are negotiated allowances that include discounted or free rent for a fixed period of time, reduced escalations, or tenant improvement allowances. Anything offered upfront probably means that the landlord has already covered it in the rent, but beware. Sometimes a clause in the lease allows the landlord to revoke the concessions if you default on your lease, and make you liable for those costs. You can also renegotiate concessions at the time of renewal, but this is best done with the help of a broker and a lawyer.
Tenant Improvements: Tenant improvements in commercial real estate are changes or alterations tenants can make to the property to customize the space to suit their needs. This can include flooring, ceilings, office partitions, air conditioning, painting, security costs and more. Tenant improvements should be negotiated before you sign the lease to outline how much the landlord will commit towards these improvements. This is called a tenant improvement allowance (TIA). Once negotiated, any amount over the TIA, will be the responsibility of the tenant. Therefore, it’s best to know how much the improvements will cost before you sign on the dotted line.
Before Signing a Commercial Lease
Letter of Intent: Often referred to as a LOI, a letter of intent to lease a commercial office space is a written document that solidifies the tenant’s commitment to rent the space. This comes before signing the lease agreement and typically summarizes the terms of the lease including the negotiations, concessions, and timeframes agreed to. The letter of intent could be binding or non-binding so be sure to know what you are agreeing to before signing it. Nonbinding letters of intent can be prepared by a broker, but should contain language that makes it clear that the letter does not formally tie you to the property, such as “the parties are not bound by this agreement.” If it doesn’t contain very clear language like this, get a lawyer.
Triple Net Lease: This is the most common type of commercial lease otherwise known as NNN. With this contract, the tenant pays all operating expenses such as repairs and maintenance. This is a good arrangement for the landlord, but for tenants it has its pros and cons. While rents are typically cheaper with a NNN lease, the costs can be variable, especially for older buildings where capital expenditures are generally high. If you enter into a triple net lease, stick with a newer building and get a sense of what the maintenance fees are and how well it’s been maintained in the past.
Sublease Clause: If you are leasing an entire floor, you should understand whether or not subleasing is allowed. Subleasing is a way to offset some of your costs by assigning part of your lease to another tenant. You can remain in the property with the other tenant or sublease the entire office space to another tenant. Your original lease with the landlord must stipulate whether or not you can sublease and if the landlord must consent to the tenant. Landlord consent is typically based on credit history, finances, and the sublessee’s willingness to abide by the original terms of the lease. Legally, this landlord consent cannot be unreasonably delayed or withheld. Also look for clauses within the clauses that put additional restrictions on your ability to sublease. If your lease fails to mention subleasing, you may be free to do so without the consent of the landlord, but as always – check with a lawyer.
Now that you’ve mastered the lingo, it’s time to find an ally to help you get the job of finding a killer office for your team handled. Here’s a great place to start: Request your free office space consultation or visit our profile on VENTUREAPP.