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Office Lease: How to Turn a Cost Into an Asset

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Every business needs a place. Although operations may be virtual, a physical space is still necessary for business processes. You could run your company from home, but the distractions of a family life will work against productivity. In addition, an office space represents professionalism and credibility.

The primary barrier to getting an office space is the cost.

The national office rent sits at $38.67 per square foot; buildings leasing offices with full services are even pricier at $0.36 more. Location is also a key factor in cost. If you must be in Manhattan, your business will pay $85.82 per square foot whereas Chicago offices are at $27.59 per square foot.

An office lease will cost your business money. But instead of viewing it as an expense, treat it as an investment.

What is a Leased Office?

A leased office is a traditional form of renting commercial space for a certain period. Its terms are outlined in a lease agreement between you, the lessee, and the landlord, the lessor.

A typical lease for an office is three to five years, guaranteeing the landlord regular payments and better returns on their property investment.

Most landlords may prefer longer leases, generally ten years. For as long as the business seems to be doing well financially, landlords would prefer to have the same commercial tenant occupying their office spaces. A longer lease allows landlords more time to recoup their expenses and avoid a costly, time-consuming process of finding a new tenant.

A ten-year lease sounds distressing, especially if you’re still a startup or business is not as stable as you’d hoped. A landlord will also consider your business stability before offering a lengthy lease for an office. Much as location, features and overall appeal form part of your considerations for choosing a leased office space, the terms must figure more significantly in your decision.

Should You Lease an Office?

minimalist office space
Photo by Laura Davidson on Unsplash

Every landlord wants to get the most profit out of their tenants. They’re running a business, so it’s fair to expect the terms of a lease to be more favorable to them. Just as you, as a commercial tenant, would want the terms to be more favorable to your business.

It’s advisable to have a real estate lawyer guide you through a leasing agreement; to represent your best interests in a negotiation. Even for small-scale office spaces, the expertise of a lawyer will help you avoid contracts that may tie you to an unacceptable agreement.

The office space you’re looking at may be in the business center, lending your business a good image. But if the agreement comes with an imprecise and unlimited operational expense clause, you may find charges in your bill that have nothing to do with running a commercial building.

Some acceptable inclusions in the operational expense clause are:

  • Janitorial services
  • Maintenance for common areas
  • Traditional repairs

Some unacceptable inclusions in the operational expense clause are:

  • Initial landscaping work (done during the development of the property, so why would you have to pay for it?)
  • Structural repairs or replacement (it’s a capital expenditure that the landlord should invest in)
  • Executive salaries

If you’ve gone far into discussions with the landlord and find an imprecise operational expense clause, pass up on the office lease. When you agree to such terms, you risk paying for fees that are not serving your business needs while you occupy a space.

How Do You Negotiate a Commercial Lease?

Again, work with a real estate lawyer when negotiating a lease. If you’ve opted to go with a luxury office because your brand dictates it, legal representation will give you the upper hand.

The deal your lawyer secures may be good for your business in that:

  • You occupy a prime spot in the business district;
  • You pay a fair price, and
  • The early termination clause will make it easy to leave.

So what should your lawyer look at during a negotiation for your business office?

  1. Length of the Lease

In an ever-changing business climate, you’ll want flexibility for your operations. One of those flexibilities covers your stay in a leased office.

What happens when the once ideal location deteriorates somehow, forcing you to relocate the business? If your lease agreement ties you to a five-year contract, you’re looking at expenses that could have been avoided with a short-term lease. Businesses that depend on location, from restaurants and bars to retail shops, could suffer financial loss while waiting out their contract in a commercial center that no longer attracts customers or is deemed unsafe.

If you like the location but are uncertain about its future development, ask your lawyer to negotiate a shorter term with an option to renew.

  1. Comparable Rents

Just as lease rates vary with each state, office rent may be determined by other rent prices in the same area. Comparable rents apply because they dictate the value of the property you’re considering. For landlords, they use it to make sure they’re not underpricing. For tenants, they use it to make sure they’re not overpaying.

Comparable rents may be used as a guide when negotiating the price. This should also cover the increase in rent (i.e., percentage added per year), which is a typical practice for many office leases. The percentage of increase each year should be fair and according to the property values in the area.

  1. The Clauses

Here’s where your lawyer becomes absolutely essential: the sneaky clauses. Much like a fine print, these terms may be overlooked and leave a tenant in a potentially devastating situation.

One clause to pay attention to is the casualty clause. It shields the landlord from a potential loss should a casualty in the building you’re leasing occurs. Maybe there’s a fire that damages part of the property you’re occupying, or it is completely gutted by another accident.

If the casualty clause does not obligate the landlord to fix the damage within reasonable time and prevents you from walking away from your lease, you’re under contract to still pay rent even if the space isn’t usable. Now, it’s another story if you caused the damage. That scenario should also be outlined in the terms of your lease agreement.

If you’re in a highly competitive industry, it would be worth asking your lawyer to negotiate a term restricting the landlord from leasing to a competitor.

Other clauses to look into are the termination clause and co-tenancy.

4. Type of Lease

large and empty office space
Photo by Nastuh Abootalebi on Unsplash

You’ll have four types of leases to come across:

  • Gross – fixed rent
  • Net – fixed rent plus some or all operating expenses
  • Percentage – fixed rent, plus percentage of the property’s profits
  • Variable – rental price that changes depending on prevailing conditions

From the get-go, the type of lease should be clear and specified in the contract. You’ll want to consult with a property agent and your lawyer to determine which type of lease may be favorable for your business in the long run.

The beauty of commerce today is advancements in technology pushing further flexibility. Your business does not have to stick to traditional leasing if your short on funding.

What’s a Shared Office?

Although most landlords have relaxed some of their terms because of COVID’s impact, it wouldn’t hurt to look at alternative office arrangements. One of those arrangements could be a shared office space.

Shared office space is an agreement between two businesses. This type of arrangement may be done by a tenant renting a private office, then rents out their unused space. It’s an ideal set up for companies that may complement each other’s products or services.

A shared office allows you to also share in overhead costs; the host (i.e., tenant renting out their unused space) typically offers the space already furnished and equipped (e.g., Wi-Fi, phones, etc.). The term of the lease is typically shorter than traditional leases in a business center.

If you’re business does not need that much space but requires the privacy and professional image of an office, sharing the commercial space may work for your needs. You do not have to worry about what to get create a productive office. And you could have access to a network that may help expand your market.

Another option to getting an office space is shared workspaces. Also called co-working spaces, these modern office arrangements bring together freelancers, entrepreneurs with startups and sometimes creative professionals in the same commercial space. Everyone has access to the usual office features, from conference rooms to receptionist and custodial services.

A common desk may be shared among multiple users around a schedule. Some of the more sophisticated shared workspaces may also provide coaches and advisors. Use of a desk or space depends on the packages offered by the service. You may pay hourly or daily rates, or lock into a fixed arrangement, which may come with more services.

Consider All Options for Your Office Space

Any kind of property investment requires careful thought, and in your case, legal expertise to ensure your best interests are protected. It is tough enough to build, develop and run a business these days with competition and shifting consumer behavior. You don’t need the added complication of a lease agreement that tilts in favor of the landlord and will not meet your business needs.

Yes, you’ll spend when renting. It may feel like your throwing away money for an asset that you’ll never own. But if your venture is growing; if your home no longer works as a place of business or you need to improve the credibility and image of your company, the right office lease can turn into a good investment.

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