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A Guide to Office Leasing PART 2!June 22, 2016
Recently, we published part of our list for our Guide to Office Leasing. Below is part 2!
6. What type of security deposit is usually requested? Is it negotiable? The most important decision a landlord makes is whether or not a proposed tenant is a good credit risk. A tenant that defaults costs the landlord substantial amounts of time and money as the space can sit empty for months while litigation proceeds. A landlord loses out on the investment they made when spending the legal, brokerage and build out costs. It is a no-win situation for all concerned so a landlord requests financial information from a tenant at the onset of the process. This could include tax returns, audited financial statements and credit reports. The landlord then makes a decision as to the desirability of the tenant and their ability to meet the lease obligations for the full term. This is then translated into a dollar amount that the tenant will need to post for the term of the lease that the landlord will retain in the event of a default. Once a landlord decides on a security deposit amount, they are rarely willing to negotiate. Since a landlord’s liability decreases the longer a tenant is in the space in good standing, occasionally they will agree to “burn down” some of the deposit over the term of the lease. This would take the form of a certain amount being released to the tenant after a specific amount of time into the lease. For example, one month’s security might be returned after two years, another month after four years, etc.
7. Will the landlord take my use? Don’t they have to? A commercial landlord has latitude as to what uses they will consider for their building. They need to consider the overall building tenant mix, impacts on the elevators and other building systems and other important factors. A commercial landlord is fully within their rights to decline any use that they do not deem fit for their property.
8. What concession do landlords traditionally offer? There are many factors that will figure into this decision. How long is the lease? What is the base rent? What is the financial standing of the tenant? How desirable is the tenant to the landlord? Concessions usually take the form of either free rent of a tenant improvement allowance (TI). The TI is granted to the tenant to be used towards the buildout of their space. This is usually outside of the Building Standard Workletter (see below) and would be used for upgrades such as extra interior glass, nicer flooring or possibly even interior plumbing. A rent abatement is usually granted to give a tenant time to wrap up the affairs at the previous place of business as they move in to the new space. This avoids a double payment of rent. It can also be used when a tenant is building out their own space and the landlord agrees not to charge them rent during the time period that the space really isn’t useable as a place to conduct business.
9. Does it make sense to have exclusive brokerage representation? This is a tenant-positive for a number of reasons. An exclusive broker has a “fiduciary” (a legal duty to act solely in another party’s interests) obligation to work in your best interests. Knowing that they are protected with an exclusive representation, a broker is able to dedicate substantial time to locating the right space without the fear of another tenant beating them to it.
10. What is a “Building Standard Workletter”? Can I upgrade it? The building standard workletter refers to the tenant improvement work that will be included in the final negotiated base rent. This would normally include the basics of an office installation: Walls, flooring, doors, ceiling tiles and lights, etc. The standard workletter would almost always provide for a basic turnkey space but many tenants elect to upgrade various components of the workletter. See item 8 above.
11. What if I need more space during the term of my tenancy? Can I move to a larger space in the building? Most landlords will do their best to accommodate a proven tenant if their space needs change but that option is totally dependent on what is available in the building at the time the tenant decides they need more (or sometimes less) space. It is important to remember that the original lease is a binding document that protects both sides. Just as a landlord can’t move a tenant out because the market would support a higher rent than the tenant might be paying at the time, neither can a tenant decide that they need to close up or move to another building while the lease is still in force. Landlords will occasionally entertain allowing a tenant to buy their way out of a lease but that is rare and can be expensive to a tenant. Once a landlord has a tenant in place with a binding lease, it is unusual to let them off the hook.
Ingram & Hebron Realty deals with all of these issues on a daily basis. We have assisted hundreds of tenants in the leasing of millions of square feet of office space. It would be a rare situation that we haven’t successfully dealt with.