How to Structure a More Flexible Office Lease

by | 17 August 2016

Have you ever heard the expression “having your cake and eating it too”? It essentially means that you want the best of everything without having to compromise. And that’s okay. I personally want the best of everything whether I’m buying a new car, a new house or signing up for a new service. In the world of commercial real estate, we see many clients who ask for the ultimate lease flexibility while still wanting all the flashy gadgets that go along with it, such as tenant improvement dollars, discounted or free rent, and more. While it never hurts to ask (which you should always do), it’s a good idea to know your limitations and alternative ways to get the same result without seeming gluttonous.

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Articulate Your Needs

It’s critical that you explain clearly and concisely to your advisors why you need flexibility in your lease. If you prefer to sign a short-term lease, explain why. Maybe it’s because you expect rapid growth. Maybe it’s because you anticipate a merger or acquisition. There could any number of reasons, and if you don’t have an in-depth conversation with you advisors, then it will be difficult for them to properly advise you and assess your needs.

Know When to End It

The termination option seems to be the most popular topic of conversation with many of my clients when it comes to negotiating the lease. It can be a good option given certain circumstances. If you’re requesting an extensive build out of your premises and you’re not willing to pitch in on cost, then expect the Landlord to ask for all unamortized real estate transaction costs along with the termination option. Not only is this typical, but it’s also fair. If your Landlord bases your lease terms on a five-year lease and you terminate after the third year, they will need to be made whole on their initial investment. Otherwise, they’ll lose money. And why would they agree to that? Most Landlords will apply an interest rate on the unamortized costs. Make sure your adviser is up to date on fair-market rates.

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Let Someone Else Take Over

Most standard commercial office leases will include a sublease provision without you having to ask for it.  In my opinion, most tenants forget that the provision even exists. I know that subleasing might not be the most ideal option, but it allows you to go market to find another tenant to lease your space. Depending on market conditions, you can even be made whole on your rent. As a matter of fact, I am just about to finish a sublease with a client, and the subtenant is paying 100 percent of the rent. The only financial obligation the Sub Landlord has is the commission. And here’s a helpful hint: Your Landlord would prefer that you sublease your space rather than try to negotiate a termination clause. It will save both you and your Landlord a lot of time and headache.

Or … Just Walk Away

The only difference between a sublease and an assignment is that under an assignment, the new tenant takes over your existing lease. Essentially, they replace your name in the lease with theirs. All other terms remain the same. Under a sublease, the Sub Landlord continues to be liable to the Landlord to pay the rent while also collecting rent from their subtenant. Under an assignment, the original tenant walks away from the lease with no further obligation to the Landlord. The new tenant takes over the existing lease along with all responsibilities.

Go Big or Go Home

Let’s say you currently need 10,000 SF of office space but forecast that you’ll need 20,000 SF or more in the near future. It would behoove you to align yourself with a Landlord who owns several buildings on the same property or in the same general vicinity. If you lease space with a Landlord who only owns that one building, then you’re subject to whatever their vacancy is when you need space. Instead, if you lease with a Landlord who owns many similar buildings, they can shift you to another building as you grow. In 2014, I helped a client lease 3,000 SF of office space with a Landlord who owns 1MSF within a large complex. They signed a five-year lease, but within two years they realized they needed to grow. We were able to successfully secure a new, 5,000 SF suite within the same portfolio with minimal financial impact to the business.

Of course, there are many nuances to each of these scenarios. Ideally, you should discuss each of them in-depth with your advisor before making any binding decisions. Most importantly, and I can’t stress this enough, articulate your reasons why. Remember, as advisors, we need to fully understand your business and any challenges that you may be facing. It’s our job to convince your Landlord that they should agree to your terms. The more in-depth information we have, the more compelling we can make our story —which should yield better results for your business.

Based in Princeton, N.J., Vinny specializes in tenant and landlord representation for Colliers International, working directly with his clients in the acquisition and disposition of office space. For more commercial real estate insight and trends, follow Vinny on Twitter.