Originally published at the Walkthrough.
When negotiating the lease for an office space, the same issues frequently arise. This article is the first in a series of three articles that provide office lease checklists for office tenants to use to review their office lease. For more information on how to review your office lease, see Use the checklists in this three part series to make sure your office lease reflects what your tenant representation broker negotiated and to make sure problems won’t arise during your tenancy.
What is Being Leased?
The space you lease should be designed in such a way that one or more occupants will feel comfortable. A comfortable room is the first step toward a happy workplace and increased productivity.
How the layout of your office space and the furnishings will affect your employees’ productivity and comfort is a critical part of the decision-making process. Before you sign a lease with your new office space provider, ensure that the physical environment is suitable for your employees, is clearly presented, and is not confusing.
Questions to Ask When Searching for Office Space
When searching for office space there are many questions to ask during your search. Main questions and considerations included:
- Does the square footage match what it should be? Does the lease describe an agreed-upon method of measuring square footage?
- Is the property described with enough detail that it could be found by someone who had never been there before?
- Is the loss/load factor satisfactory?
Office Space Floor Plans
When reviewing office space in person, it's important to review whether the property matches the floor plan. Understanding omissions such as hallways, equipment, bathrooms and other areas may be cause for further investigation or suspicion.
Multiple, Mixed-Use & Office Amenities
Does the project or property lease consist of multiple spaces, buildings and/or uses? It's key to understand exactly what property and what uses of the facilities your organization gets in your office lease. Are common areas clearly and accurately delineated? How much access and use of common areas is the tenant allowed? Having an experienced commercial real estate advisor is key to getting accurate property requirements and maximum use and benefit from your property like waiting rooms and storage.
Parking Spaces for Your Employees & Handicap-Accessible Entryways & Exits
Planning the future space for your employees also means how they can get to their jobs. The parking situation and costs associated along with understanding any systems in place for movement to and from parking areas as well as solving problems with the amount of parking available as well as any associated fees? Additionally, it's important that your property has accessibility to all of your customers. Not having appropriate access can indirectly cause poor word of mouth publicity or worse, open your company up to avoidable litigation.
Building or Surrounding Properties Under Construction
Also, a potentially major additional consideration is the current or planned construction at our around the office space you're searching for. Understanding the current and potential property tax implications of further surrounding additions also need to be taken into account to determine future increases in property taxes, lease costs, and your operating expenses if you choose the property.
Understanding Your Office Lease
If you've decided on a property and intent to move forward with an office lease there are key things you need to understand including:
- What services will be paid by the landlord?
- Will you be held responsible for building taxes, maintenance, and/or insurance?
- Are you responsible for paying utilities or other fees? What are the utility fees? When and how are they paid?
- Does your agreement provide any period of complimentary rent? How much will the rent increase annually or projected after your lease nears expiration? When do the increases take effect?
- How much is the Pro Rata Share? Does the agreement provide for any changes?
- What will your total expenses for the lease be including taxes?
- Are you being allowed to review and confirm the operating costs?
- What about the building’s hours of operation? Do they make sense? What days/hours are excluded? Are you limited access to your property "after hours"?
- Which hours of A/C and heat usage will be added as extra charges? For after-hours usage, how will fees be assessed? How much will charges amount to? Are charges in line with what they should be?
The office lease considerations are just an initial starting point and it's encouraged to get an experienced tenant representation broker that assists you throughout every stage of the office space negotiation and renegotiation process of their lease agreements.
What is a Work Letter Cover?
The Work Letter is a confirmation of the tenant’s acceptance of the lease terms and conditions, and its consequences. The letter should include a brief description of the lease, the tenants’ obligations, and the significant dates of the lease. The letter should also include a list of the tenants’ current and proposed business activities in the space. The Work Letter should also include the tenant’s intended use of the space, the expected occupancy and number of persons, and the intended hours of operation.
What Does the Work Letter Cover?
The purpose of the Work Letter is to provide the tenant with a clear explanation of the issues that affect the lease, and to provide the tenant with a way to process the issues and determine the tenant’s response. The tenant should always prepare a response to lease terms, and then have it reviewed by their real estate attorney. The tenant should seek legal advice before they sign the Work Letter. The tenant should not sign the Work Letter, nor should they issue a counter-letter, until they have first consulted their attorney.
Build-out controlled by landlord
- Tenants should have approval over any work plans.
- Commencement date should not occur until all work has been approved by the tenant's or landlord’s architect as substantially completed, AND the tenant has received a certificate of occupancy for the improvements.
- When will the tenant be responsible for costs that run over the allotted budget? Until everything on the punch list is finished there should be some hold back.
- Is the tenant granted a termination right if the leased property is not handed over in the agreed-upon time frame?
- Is the tenant allowed to enter the premises to install furniture, fixtures, etc. before work has been substantially completed?
- Will the construction be completed by bid?
- What control will the tenant have over the construction process? Will their approval be required for items such as the budget, major contractors, and schedule? If the tenant must pay construction costs it is crucial to have these requirements.
- Is the schedule for the tenant’s deliveries and approvals reasonable?
- Is the process of making changes to the original scope of work clear?
- How much is the construction management fee? Will it include hard costs or soft costs? Or some combination of the two?
- What will be considered a Tenant Delay? Must the tenant be given proper notice before the delay can be counted?
- Is there any security around the obligation for the tenant to pay for improvements?
- Will a warranty for the tenant improvements be supplied by the landlord? How long does it last?
Build-out controlled by tenant
- Will correct plans for the building prior to improvements be provided by the landlord?
- Have the proposed general contractor and architect been authorized by the landlord?
- Has the base building core been accurately described? No base building costs should be treated as improvement costs.
- Is there a tenant improvement allowance? How and when will it be paid?
- What can the tenant improvement allowance be used for?
- Will the tenant be able to meet the target completion dates set by the landlord?
- Can the commencement date be altered if the landlord causes delays?
Understanding the Hidden Clauses & Fine Print in Your Office Lease
In terms of an office space lease, a lot of concessions and cost can go into not accurately reviewing the terms in your office lease agreement. A quiet, hidden clause at the end of a real estate contract may nullify some of the more noticeable and appealing clauses at the forefront of the agreement.
Review the following items in your office lease:
Square Footage Changes
Landlords may change the square footage to include closet space or patios due to a general lack of knowledge on the guidelines for official square footage recording. Upon questioning, a landlord may negotiate down on pricing when pressed on accurate measurements.
Hidden Fees in Office Lease for Fabricated Amenities
Look for crafty terminology to find included charges that are not standard, such as common room use, or exclusive residence use fees.
Look for Questionable Audit Phrasing
Be aware of the terminology of issues, problems or suggested future maintenance or service tucked into extensively worded audit reports. These issues could be problematic and costly if left to the new owner or tenant to resolve.
Get Precise Wording for Subletting
If the tenant should expect to ever need to sublet the real estate, it is important to first have an accord before signing a lease as to under what confines this can occur, for fairness on the part of both parties.
Protection from Lenders
A good part of ownership security is a guarantee of no harassment by lenders that have dealt with the landlord. A tenant is well advised to ensure that a contract states no responsibility on their part is made to the lenders. A warning sign of pre-existing lender issues is offense taken by the landlord at the request of such from a possible tenant.
Texas Real Estate Services
These office lease considerations are just a starting point in your journey for the perfect office space to accommodate your organization's current and future needs. If you're searching for office space, you should have an experienced commercial real estate advisor to negotiate your office lease to ensure you have a tenant's agreement that benefits your current and future office space needs.
Buying, selling and leasing real estate in Texas is often a rewarding prospect for families and businesses. Pride Street Realty offers experienced Texas real estate services that save you time, money and hassle while bringing your transaction to the closing table faster. From real estate buyer and seller representation to commercial, office space and property management services, contact us today to learn how to assist you through every phase of property leasing & ownership.