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The length of your office space lease term is a negotiable item however it depends on a number of factors such as market conditions in your city, the cost of tenant improvements, or simply the landlord’s preference. Office Space Market ConditionsIf you live in a city where there is extremely low office space vacancy (e.g. Austin, Tx) you are in what’s called a landlord’s market. Deal points can still be negotiated however if the landlord has a lot of interest from other parties they have more leverage in the negotiations and will likely require a minimum of 3-5 year leases. In some cases even longer. Landlord’s PreferenceIn some cases, regardless of market conditions, the landlord just won’t budge on office leases shorter than 3 years. It doesn’t matter if they have had a space vacant for 6 months. You see if a multi-tenant building is mostly occupied (e.g. 85%) and the landlord is still profitable they don’t have any reason to offer a shorter lease. Unlike a single house that sits vacant for 6 months office landlords are still making money. Cost of Tenant ImprovementsWhen leasing office space you typically negotiate for the landlord to give you a tenant improvement allowance (TIA) as part of the deal. The more TIA they give you the longer the office lease term they are going to require.
via Tumblr How Long Does My Office Space Lease Term Have to Be? When leasing office space there are typically concessions that you can negotiate for that will give you a better overall deal. Once of those concessions is free rent. Depending on how active the market is and the type of space you should be able to negotiate to receive free base rent or free base rent and operating expenses for a certain number of months. The problem is that most tenants don’t know what to ask for, or they are afraid to ask for it. Because of that they end up leaving money on the table. As you tour office spaces and meet with landlords and landlord agents always ask if free rent concessions are available. They won’t always tell you however it’s worth trying. You could also visit nearby tenants and ask what free rent concessions they were able to negotiate. As you negotiate your office lease below are a few strategies to consider when asking for free rent. Justify Why You Need Free Office RentDon’t just ask for it for no reason. You can increase your chances of getting it if you have a business case. For example, If your business is seasonal and you are opening up during the slower part of the year then that would be a good reason to ask for free commercial rent. Do some research and find out what free rent (if any) the landlord is offering to new tenants. If the landlord is giving new tenants 4 months of free rent you should ask for the same whether you are leasing space at that location for the first time or negotiating a lease renewal. Existing tenants have proven themselves and are less of a risk to landlords than new tenants. If other comparable properties are offering free rent then you should negotiate for free rent with your existing landlord. Build-Out PeriodTenants should never have to pay rent during their build out phase. You should be able to negotiate at least 60 to 120 days for building out your space, during which time no rent or operating expense payments are due. Don’t let the landlord refer to this as Free rent as it is not. Base Rent Free OR Base Rent & Operating Expenses?Again get to know the landlords and market however when negotiating free rent you can ask for only base rent OR base rent and operating expenses (aka nnn). It’s good to always start with base and nnn then work from there. In most cases landlords would like to at least cover their nnn costs while you enjoy free base rent. If they won’t agree to abate nnn then you could ask for more free base rent then you had planned on. In Austin landlords are more likely to require you to pay for operating expenses during your free rent period. Early OccupancyLet’s say you signed a 6 year lease and the commencement date is set for January 1st. You could negotiate with the landlord to start the commencement date July 1st (6 months later) but allow you to open for business on January 1st as originally planned. It’s worth it to some landlords to wait a few months for rent payments to start if they have a good long term tenant in tow. Depending on their cash flow needs some landlords may agree to this and some won’t, however if you don’t ask you will never know. Ask For More Free Rent Than You Need
Don’t ask for what you expect to get. Ask for more than that. If you ask the landlord for 3 months of free rent you may end up only getting 1. If you ask for 5 you may get 3. Again if you don’t ask you will never know. However don’t low ball just because. Make intelligent offers based on your market research. If you low ball some landlords won’t take you seriously. Consider Adding More Term to The Lease
If a 3 year lease is on the table and the landlord won’t give you 3 months free rent, consider offering to increase the term to 33 months. Free rent concessions reduce a landlords rate of return, however adding term may make up some of the difference and incent them to give the concession. Offer to Spread The Free Rent Out Over a Period of TimeIf a landlord has any reservations about your financial situation they won’t want to give free rent. They would be afraid that you would go out of business soon after the free rent period which means they won’t recoup what they gave. A way to counter this is to offer to take the free rent over a period of time rather than all up front. For example in a 5 year lease with 5 months free rent you could negotiate to receive 1 month of free rent in January of each year. That way it spreads out the landlords risk, but you still get 5 months free rent. via Tumblr How to Negotiate Free Rent in An Office Lease Rent escalation is a pre-negotiated lease clause in which a tenants base rent is increased on an annual basis. Rent escalation clauses in commercial leases are negotiable however landlords push for this for two reasons
When leasing commercial real estate for terms longer then 1 year you will typically see rent escalation clauses throughout the lease contract. Below are a few types of rental escalation clauses typically used. Stepped Rent Escalation ClauseThe most common stepped rents are increases by a negotiated dollar amount each year. For example, let’s say your first years base rent is $20 sf. In years 2-5 your base rent is increased by $0.50 each year. It depends on the market you are in however in most cases annual increases will be anywhere from $0.50 to $1.00 sf. Stepped rents are useful when a tenant needs to conserve cash during the first couple years of their business and needs a lower rent amount. The landlord may have lower cash flow at first however they will recoup that in the later years. In a strong market you will see yearly increases regardless. Consumer Price Index ( CPI) Rent EscalationIn this situation, the landlord wants to make sure their base rents are keeping up with inflation. Rents will be escalated according to the Bureau of Labor Statistics CPI index. In recent years the average is 3% to 4% however during times of high inflation they can sky rocket. The key here for a tenant is to negotiate a fixed annual percentage increase. That way if the CPI increases at a faster rate you are protected. An open ended CPI increase is more beneficial for the landlord as it protects them from rent erosion during times of inflation during soft markets. Operating Expense IncreasesOperating expenses are the taxes, insurance, and maintenance charges for the property that are typically passed on to Tenants. You may see leases structured as Base Year or NNN (Triplenet) leases. Operating expenses are “estimated” each year based on historicals. At the end of the year landlords will reconcile their books to determine their actual operating costs. In a NNN lease Tenants will be charged operating expense costs that exceed the original estimates. In a base year lease the tenant will be charged the amount that exceeds their pre-negotiated base year expense stop. via Tumblr Rent Escalations in Commercial Leases Before beginning your search for warehouse space, it’s crucial that you know your current and future business needs when it comes to industrial space because not every warehouse property has the same features. For example, some have truck courts big enough to accommodate 18 wheelers, and some don’t. Some have dock high loading, and others only have grade level. It’s important that you pick the right property because renting the wrong one can cost you hundreds of thousands, so make sure to do a lot of due diligence (or have your agent do it for you) because you can’t only rely on what the landlord’s listing agent tells you. Once you have a handle on your current and future business needs and have a rough idea of your ideal location, size, layout, and budget, then you are ready to start your warehouse property search and tour spaces to figure out which ones will work best. Because every industrial building is not created equal, you need to ask a lot of questions to find out the features of each and determine which ones will work best. Questions To Ask About Industrial PropertiesWhat is the property zoning?You need to ensure the area and building is zoned for industrial use What “Use” is the property approved for?If the property was previously used for manufacturing and your use is warehousing, you will need to apply for a change of use permit with the city. What building power is available?If you’re in manufacturing, then you may need more electric power than the average company. For example, the equipment you use may need 3 phase power. What is the building clear height?Clear height is the warehouse ceiling height. The more you have, the higher you can stack What are the warehouse loading options?Does the space have dock high or grade level loading? If you ship and receiving using 18 wheeler, then you need dock high. How big is the truck court?You need to make sure the truck court is big enough for 18 wheelers to maneuver around. Does the warehouse have a fire sprinkler system?Some businesses are required to have fire sprinklers in the warehouse. Check with your insurance agent and/or the clients you work with. Can I park delivery trucks or trailers overnight?If you plan on leaving trailers or trucks on the premises overnight make sure you are allowed to. Do you have any industrial yard space?Some businesses need outside storage to store raw materials. We have only scratched the tip of the iceberg here. As you can see, there is a lot of info you need to know about each industrial building so you can make sure to ensure they will meet your needs. When searching for warehouse space for rent and touring properties make sure you know your needs and what questions to ask property owners and landlord agents. If you are unsure or don’t have much experience, then consider hiring someone who is. If you need helping finding warehouse space for rent Austin Tx give us a call. via Blogger Things to Look For When Touring Warehouse Space Before beginning your search for warehouse space, it’s crucial that you know your current and future business needs when it comes to industrial space because not every warehouse property has the same features. For example, some have truck courts big enough to accommodate 18 wheelers, and some don’t. Some have dock high loading, and others only have grade level. It’s important that you pick the right property because renting the wrong one can cost you hundreds of thousands, so make sure to do a lot of due diligence (or have your agent do it for you) because you can’t only rely on what the landlord’s listing agent tells you. Once you have a handle on your current and future business needs and have a rough idea of your ideal location, size, layout, and budget, then you are ready to start your warehouse property search and tour spaces to figure out which ones will work best. Because every industrial building is not created equal, you need to ask a lot of questions to find out the features of each and determine which ones will work best. Questions To Ask About Industrial PropertiesWhat is the property zoning?You need to ensure the area and building is zoned for industrial use What “Use” is the property approved for?If the property was previously used for manufacturing and your use is warehousing, you will need to apply for a change of use permit with the city. What building power is available?If you’re in manufacturing, then you may need more electric power than the average company. For example, the equipment you use may need 3 phase power. What is the building clear height?Clear height is the warehouse ceiling height. The more you have, the higher you can stack What are the warehouse loading options?Does the space have dock high or grade level loading? If you ship and receiving using 18 wheeler, then you need dock high. How big is the truck court?You need to make sure the truck court is big enough for 18 wheelers to maneuver around. Does the warehouse have a fire sprinkler system?Some businesses are required to have fire sprinklers in the warehouse. Check with your insurance agent and/or the clients you work with. Can I park delivery trucks or trailers overnight?If you plan on leaving trailers or trucks on the premises overnight make sure you are allowed to. Do you have any industrial yard space?Some businesses need outside storage to store raw materials. We have only scratched the tip of the iceberg here. As you can see, there is a lot of info you need to know about each industrial building so you can make sure to ensure they will meet your needs. When searching for warehouse space for rent and touring properties make sure you know your needs and what questions to ask property owners and landlord agents. If you are unsure or don’t have much experience, then consider hiring someone who is. If you need helping finding warehouse space for rent Austin Tx give us a call. via Tumblr Things to Look For When Touring Warehouse Space When leasing commercial real estate properties such as office space, retail space, or warehouse space, landlords will typically offer incentives to get tenants to lease space in their building. One of those incentives is offering a tenant improvement allowance (aka TI Allowance or TIA) to build out the space custom to your needs. The tenant improvement allowance is the amount of money that landlords are willing to spend or give to a tenant to renovate an office space in the landlords office building. It’s typically offered as a total dollar amount or a dollar per square foot and negotiated up front. The goal of the tenant should be to negotiate enough tenant improvement allowance to cover most (if not all) of the total construction costs. For example say you like a space, however it would be even more perfect if you could have 2 more offices and a break area with plumbing. During the negotiation process you would want to ask for an allowance (MONEY) to build out the space. The amount is typically negotiated and contingent on your credit, length of lease term. rental rate, market you are in, etc… How Do You Get It?It’s handled differently depending on the type and size of commercial space you’re renting. Landlord ControlledAt lease signing you have to write a check for any construction costs that exceed what the TIA will cover. Then the landlord will pay the contractors and all other vendors directly for all construction costs. In most cases with smaller office space (less than 10,000 sf) if the landlord has a construction manager they will want to hire the contractors and oversee the process. This is because they know the building well, have experience with office space build-outs, and have relationships with a lot of different contractors which they can leverage to keep costs to a minimum. When a landlord manages the construction process it’s known as a “Turnkey Build-out”. Having the landlord manage this saves you time however their interests may not line up with yours. They may not seek as many competitive bids or have any incentive to cut costs, and if you make changes after the architectural plans have been approved you will be charged change order fees. Also, if the construction costs end up being less than the TIA you will not receive the difference. For example if the TIA was $25 sf and the construction costs ended up being $20 sf you will lose the $5 sf. If the landlord insists on managing the construction process then make sure to request that you have the ability to be a part of the general contractor approval process and that you are given a detailed work letter that outlines the construction process from beginning to end. Tenant ControlledThe time frame of payment of the TIA is determined during lease contract negotiations. It will either be paid out after the construction has been completed and landlord receives all the receipts, OR be paid in cash at lease signing. You could also negotiate to have it paid a progress payments as work is completed. For larger spaces you or a project manager you hire would want to manage the construction process. This will give you more control over the costs, timing, and details of the project. In addition you have the power to select the contractor that you want. What is the Average Tenant Improvement Allowance?The tenant improvement allowance you receive will depend on a number of factors such as the market, lease term, your credit, type of space, etc. In general if the space is brand new (aka in shell condition) Landlords might offer $25 to $40 sf. If the space is 2nd generation (has been leased occupied before) landlords may offer $20 or less. At the end of the day it’s important for the tenant to have a general idea of how much the construction will cost. During the negotiating process it would be a good idea to get at least 1 or 2 preliminary construction bids. You don’t want to accept a tenant improvement allowance of $15 only to find out that the total costs will be $25 sf. If you are not able to negotiate enough tenant improvement allowance to cover the total costs then you could ask for additional tenant improvement allowance to be amortized. How Do you Calculate the TI Allowance?The tenant improvement allowance is typically given based on the rental square feet (RSF) of the commercial space. To calculate the Tenant improvement allowance simply multiply the RSF by the TI allowance you have negotiated. For example if the square footage is 5,000 RSF and the tenant improvement allowance is $20 RSF. 5,000 x $20 = $100,000 What Does it Cover?The tenant improvement allowance typically covers architectural, engineering and space planning fees as well as the total hard construction costs. In addition, if negotiated such allowance may be used at Tenant’s option for the cost of consultants, legal fees, Tenant Improvement Allowance Must Be NegotiatedAgain the tenant improvement allowance is a negotiated amount that the landlord will spend to customize the space to your particular needs and is typically quoted in dollars per square feet. They won’t always agree to pay for 100% of your ideal layout….especially if you are asking for hardwood floors, granite countertops, and other above standard finishes. Again landlords won’t just give you a tenant improvement allowance. You must know the market and negotiate well. When evaluating spaces make sure to take note of your needs such as the ideal # of offices, break area, conference rooms, etc. If you need a more customized layout make sure you ask for it before signing a commercial lease. You want to compare how much allowance each landlord is willing to give. Ideally you want them to pay for 100% of your build-out costs, however it all depends on your credit, length of lease term, the rental rate, and on whether it’s a tenant or landlord market. Who Gets To Keep the Improvements?The landlord is giving you a tenant allowance in return for your tenancy, and you may end up spending additional money out of your own pocket above and beyond the TIA however all the leasehold improvements will convey with the landlord. Tenant improvements-allowance. Example of TIA in Commercial Lease AgreementConstruction Allowance. Provided Tenant is not in default on the lease contract, Landlord agrees to give up to $300,680.00 (the “Construction Allowance”) to the cost of Landlord’s Work. Any costs of finishing Landlord’s Work above the Construction Allowance shall be Excess Costs (as defined below). Tenant shall pay Landlord a construction management fee equal to 4% of the cost of Landlord’s Work to compensate for its construction management services in connection with Landlord’s Work. Landlord shall deduct such fee from the Construction Allowance. The Construction Allowance is available for Tenant’s use from the date of this Lease through the last day of the twelfth (12th) full calendar month following the Commencement Date, after which Tenants right to same will expire and be of no further force and effect. 1.3 Additional Allowance. If the total construction costs exceed the Construction Allowance, Tenant may, before Landlord’s Work has been completed, ask that the Landlord increase the Construction Allowance by the amount of the excess, up to $60,420.00 (the actual amount of the increase being the “Additional Allowance”). If Tenant asks for the increase in the Construction Allowance, then Landlord shall raise the Construction Allowance by the amount of the Additional Allowance. Landlord shall prepare, and Landlord and Tenant shall promptly execute an amendment to the Lease increasing the Base Rent by the amount needed to amortize the Additional Allowance over the Lease Term at 9% per annum, with the increased payments starting with the first Base Rent payment due under this Lease. via Blogger What is a Tenant Improvement Allowance? When leasing commercial real estate properties such as office space, retail space, or warehouse space, landlords will typically offer incentives to get tenants to lease space in their building. One of those incentives is offering a tenant improvement allowance (aka TI Allowance or TIA) to build out the space custom to your needs. The tenant improvement allowance is the amount of money that landlords are willing to spend or give to a tenant to renovate an office space in the landlords office building. It’s typically offered as a total dollar amount or a dollar per square foot and negotiated up front. The goal of the tenant should be to negotiate enough tenant improvement allowance to cover most (if not all) of the total construction costs. For example say you like a space, however it would be even more perfect if you could have 2 more offices and a break area with plumbing. During the negotiation process you would want to ask for an allowance (MONEY) to build out the space. The amount is typically negotiated and contingent on your credit, length of lease term. rental rate, market you are in, etc… How Do You Get It?It’s handled differently depending on the type and size of commercial space you’re renting. Landlord ControlledAt lease signing you have to write a check for any construction costs that exceed what the TIA will cover. Then the landlord will pay the contractors and all other vendors directly for all construction costs. In most cases with smaller office space (less than 10,000 sf) if the landlord has a construction manager they will want to hire the contractors and oversee the process. This is because they know the building well, have experience with office space build-outs, and have relationships with a lot of different contractors which they can leverage to keep costs to a minimum. When a landlord manages the construction process it’s known as a “Turnkey Build-out”. Having the landlord manage this saves you time however their interests may not line up with yours. They may not seek as many competitive bids or have any incentive to cut costs, and if you make changes after the architectural plans have been approved you will be charged change order fees. Also, if the construction costs end up being less than the TIA you will not receive the difference. For example if the TIA was $25 sf and the construction costs ended up being $20 sf you will lose the $5 sf. If the landlord insists on managing the construction process then make sure to request that you have the ability to be a part of the general contractor approval process and that you are given a detailed work letter that outlines the construction process from beginning to end. Tenant ControlledThe time frame of payment of the TIA is determined during lease contract negotiations. It will either be paid out after the construction has been completed and landlord receives all the receipts, OR be paid in cash at lease signing. You could also negotiate to have it paid a progress payments as work is completed. For larger spaces you or a project manager you hire would want to manage the construction process. This will give you more control over the costs, timing, and details of the project. In addition you have the power to select the contractor that you want. What is the Average Tenant Improvement Allowance?The tenant improvement allowance you receive will depend on a number of factors such as the market, lease term, your credit, type of space, etc. In general if the space is brand new (aka in shell condition) Landlords might offer $25 to $40 sf. If the space is 2nd generation (has been leased occupied before) landlords may offer $20 or less. At the end of the day it’s important for the tenant to have a general idea of how much the construction will cost. During the negotiating process it would be a good idea to get at least 1 or 2 preliminary construction bids. You don’t want to accept a tenant improvement allowance of $15 only to find out that the total costs will be $25 sf. If you are not able to negotiate enough tenant improvement allowance to cover the total costs then you could ask for additional tenant improvement allowance to be amortized. How Do you Calculate the TI Allowance?The tenant improvement allowance is typically given based on the rental square feet (RSF) of the commercial space. To calculate the Tenant improvement allowance simply multiply the RSF by the TI allowance you have negotiated. For example if the square footage is 5,000 RSF and the tenant improvement allowance is $20 RSF. 5,000 x $20 = $100,000 What Does it Cover?The tenant improvement allowance typically covers architectural, engineering and space planning fees as well as the total hard construction costs. In addition, if negotiated such allowance may be used at Tenant’s option for the cost of consultants, legal fees, Tenant Improvement Allowance Must Be NegotiatedAgain the tenant improvement allowance is a negotiated amount that the landlord will spend to customize the space to your particular needs and is typically quoted in dollars per square feet. They won’t always agree to pay for 100% of your ideal layout….especially if you are asking for hardwood floors, granite countertops, and other above standard finishes. Again landlords won’t just give you a tenant improvement allowance. You must know the market and negotiate well. When evaluating spaces make sure to take note of your needs such as the ideal # of offices, break area, conference rooms, etc. If you need a more customized layout make sure you ask for it before signing a commercial lease. You want to compare how much allowance each landlord is willing to give. Ideally you want them to pay for 100% of your build-out costs, however it all depends on your credit, length of lease term, the rental rate, and on whether it’s a tenant or landlord market. Who Gets To Keep the Improvements?The landlord is giving you a tenant allowance in return for your tenancy, and you may end up spending additional money out of your own pocket above and beyond the TIA however all the leasehold improvements will convey with the landlord. Tenant improvements-allowance. Example of TIA in Commercial Lease AgreementConstruction Allowance. Provided Tenant is not in default on the lease contract, Landlord agrees to give up to $300,680.00 (the “Construction Allowance”) to the cost of Landlord’s Work. Any costs of finishing Landlord’s Work above the Construction Allowance shall be Excess Costs (as defined below). Tenant shall pay Landlord a construction management fee equal to 4% of the cost of Landlord’s Work to compensate for its construction management services in connection with Landlord’s Work. Landlord shall deduct such fee from the Construction Allowance. The Construction Allowance is available for Tenant’s use from the date of this Lease through the last day of the twelfth (12th) full calendar month following the Commencement Date, after which Tenants right to same will expire and be of no further force and effect. 1.3 Additional Allowance. If the total construction costs exceed the Construction Allowance, Tenant may, before Landlord’s Work has been completed, ask that the Landlord increase the Construction Allowance by the amount of the excess, up to $60,420.00 (the actual amount of the increase being the “Additional Allowance”). If Tenant asks for the increase in the Construction Allowance, then Landlord shall raise the Construction Allowance by the amount of the Additional Allowance. Landlord shall prepare, and Landlord and Tenant shall promptly execute an amendment to the Lease increasing the Base Rent by the amount needed to amortize the Additional Allowance over the Lease Term at 9% per annum, with the increased payments starting with the first Base Rent payment due under this Lease. via Tumblr What is a Tenant Improvement Allowance? |
AuthorI help people and my clients find the right house to call their home. I specialize in home buying and selling, investment properties, luxury homes, and multi-residential properties. https://en.gravatar.com/nicholemhearn ArchivesCategories |