The Tenant’s Ultimate Guide to Renting Office Space
Renting office space can be an exciting and momentous step towards growing your business. Locating and leasing your ideal office space can be overwhelming, especially if embarking on the project alone. There are various factors to consider when choosing an office space to lease to ensure you’re setting your company up for success. A lot of planning goes into site selection as well as the building in which your commercial office space will be located. This comprehensive guide has been designed to help small business owners like you avoid mistakes and choose an office space that fits the needs of your business and your clients.
- Step #1: Establish Your Commercial Office Space Parameters
- Step #2: Become Familiar with Commercial Lease Terms & Variables
- Step #3: Tour Commercial Office Spaces for Lease
- Step #4: Review & Negotiate the Commercial Lease Agreement
- Decide Length of Lease
- Commercial Lease Clauses
- Get Insight
- Property Inspection
- Step #5: Lease Negotiations & Final Signatures
Step #1: Establish Your Commercial Office Space Parameters
The is the starting point of your search for suitable commercial office space to rent is understanding your needs for your working area. You cannot identify and set up an ideal office space unless you know your spatial requirements for business operations. Spend some time thinking about your current office and what you would like different in a new space. For example, perhaps your headcount has exceeded the capacity for the conference room and therefore the new office lease must have a larger conference room in order to be able to seat all board members. Here are some other factors to consider:
- What is my goal for renting office space?
- How do we want to use our office space?
- Who will come to our office: employees, vendors, clients, partners, etc.?
- How do employees get to work?
- Where are my customers?
- Do we need room for storage?
The next most important factor to consider is determining how much space you will require.
The Space Factor
Space needs can vary greatly depending on your company, industry, and also your geographic location. A typical office usually plans for 200 SF/person.
- What is our company headcount?
- Will we need cubicles, private offices, or an open floor plan?
- Will we need storage?
While it’s generally easy to gauge the number of offices you will need for your team, also keep in mind the type of work you will be performing and plan for growth. Look into an expansion option in your initial commercial office lease, especially if the lease will be long term. Depending on the types of activities you envision for your company, ask yourself these questions:
- What type of office space will we need? Traditional office or flex space?
- Will we need a reception area, conference rooms, and private offices?
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Location, Location, Location
Location – it’s one of the top factors when renting office space for any business. After deciding how much office space you will need for your commercial lease, it is time to begin thinking about where in town you want the new office. How do you know whether a location is suited for your business? Consider the following:
- Where are my employees located and how do they get to work?
- Where are my clients located?
- Is this location suitable for partners and vendors?
- Are there attractive amenities such as restaurants and parks nearby?
- Is the location in proximity to major modes of transportation?
Analyze the needs of your business as well as your customers before finalizing the new office location. There are a couple of general rules to keep in mind when selecting office space for your business to help you narrow down your search. Most financial and accounting firms choose the Central Business District (CBD) of the city or town for their office locations. On the other hand, businesses that require air travel quite frequently need to be located near an airport. In rare cases, the choice of the office space is done based on proximity to the main buyer.
- Downtown or CBDs tend to have law firms, financial and government-related businesses
- Warehouse/Industrial, Aviation, Import/Export, and Manufacturing industry businesses are typically closer to the airport
- The Suburban part of town attracts general business, residential communities, the workforce, and customers
- Specific industries such as Technology, Energy, and Healthcare usually reside in the Adjacency Areas of cities
- Specialized Need: Specific Customer
Once you’ve selected a general location to consider, ask yourself:
- Are there restaurants and coffee shops that I can take my clients to?
- Can clients find our office easily?
- Is there a place for signage?
- Is the space close to public transportation and does it have freeway access?
Impressions matter when it comes to commercial office space. Setting up office space isn’t only for your staff; it’s also for clients and visitors.
Impressions matter when it comes to commercial office space. Setting up office space isn’t only for your staff; it’s also for clients and visitors. If you are only going to be visited by vendors and suppliers you do not necessarily need an impressive space. However, if your clients and partners are going to visit your office space often, you will need a place that is elegant as well as functional.
What are the main features you want in your office? Some businesses need a beautiful reception area to seat visitors, while others need a conference room to hold meetings with clients and suppliers. You should consider an office space lease only if you are getting the must-have amenities for your business.
What does an average business need to rent office space?
- Private offices for partners and proper space for adding cubicles
- Conference Room
- Sitting area with or without reception
- Lunch area
- Print and Mailroom
- Restrooms and drinking fountains
You can add or subtract from this basic list of requirements, but this will get you started. Be sure to have a finalized list before touring properties.
Make sure you have an operating budget in place and account for extra expenses before you start your search for commercial office space. Your finalized budget should have sufficient funds allocated to pay for all operating expenses for three months, plus a one-month advance deposit requested by most Property Managers. Be sure to account for all of the operating expenses associated with moving and functioning in the new space such as decorating the new space, monthly utilities, possible parking garage costs, and so on.
Your finalized budget should have sufficient funds allocated to pay for all operating expenses for three months, plus a one-month advance deposit requested by most Property Managers.
The Property Class can help you determine how much to pay for office space lease. Class A buildings are usually less than 10 years old, have high-end finishes and amenities and tend to be the most expensive. The Class B category contains most office leases. These buildings are typically 5-30 years old with average finishes and amenities such as a deli, security patrol, and daytime cleaners. Class C meets the most basic needs of an office user with very limited amenities but is typically the least expensive option to lease.
One thing to note, building class refers to the actual property’s physical attributes and not the way it is managed. There are a lot of B and C class properties that are expertly run and make sense for your business if the location and the price is right.
Once you have answers to all these questions, you are ready to start your search for an ideal office space to rent for your business.
Step #2: Become Familiar with Commercial Lease Terms & Variables
Commercial Office Lease Types
It’s critical to understand the variety of commercial lease types in order to properly forecast and budget operating expenses.
With Full-Service or Gross Leases the repairs & maintenance, property insurance, property taxes, utilities, janitorial services, and the space is included in the monthly rent paid by the tenant and the property manager of the building is responsible for all included items.
In contrast, only the space is included in the monthly rent for a Triple Net or NNN Lease. Therefore the tenant pays the monthly rent rate plus the property taxes, property insurance, and operating expenses – the three “N”s. Typically the tenant independently contracts with outside vendors for these items.
- The tenant pays the monthly base rent plus the property taxes and property insurance in a Double Net or NN Lease.
- The building owner or property manager pays the operating expenses and property taxes with a Single Net on N Lease.
- The tenant is responsible for the monthly rent and property taxes.A Gross + Electric Lease means that all expenses associated with the property are included in the rent except for electricity.
When determining which lease structure is best for your business, keep in mind that it is important to budget for operational expenses increases over time. Operating expenses cover all aspects of leasing office space and the Property Manager will try to include as many as possible into the lease agreement.
Be prepared to negotiate these provisions in the lease and make sure the language is as detailed as possible.
A savvy tenant should look to push the Property Manager on certain expenses and negotiate them out of the lease. A couple of provisions to be aware of are:
- Property Manager cost of doing business: The tenant should not have to pay for interest on loans, bad debt, acquiring new tenants, legal fees, expenses for high-level executives and other non-property personnel.
- Property Manager’s Risk: costs to defend or prosecute lawsuits, environmental or tax change laws, costs related to design or construction of the building.
Most Property Managers do not expect a tenant to pay these costs but they will still put them into a lease to see what can be negotiated. One last consideration for a tenant to think about is the right to audit the Property Manager. Property Managers don’t like to disclose financial information but the only way to truly forecast your operating expenses is to negotiate for an audit. Negotiating operating expenses is one of the most important steps in the leasing process with your Property Manager, so before signing a lease consider all provisions and pass-throughs carefully to ensure you are getting the best deal.
Office Square Footage
When you are in the market to lease commercial office space, it is easy to become confused with terms and abbreviations related to square footage. Let’s break it down:
- USF = Usable Square Feet
- CAM = Common Area Maintenance
- RSF = Rentable Square Feet (USF + CAF)
USF refers to usable square feet that will be exclusively used by the office tenant whereas CAM refers to all of the common areas in a building that are available for the nonexclusive use of tenants such as lobbies, corridors, bathrooms, and parking lots. In other words, the RSF is the sum of usable square feet and a portion of the common area. As a tenant, you will need to keep in mind that the CAM will be added to the base USF to determine the RSF, which can range from 12%-20%.
Office rent is usually quoted as a monthly or annual cost per rentable square foot. Executive Suites typically bundle services together and are quoted as a total cost per month without reference to square footage. Always make sure to ask yourself if your proposed office space will efficiently meet your needs. A lot of times you will see poorly designed buildings that leave wasted space or build-outs by a previous tenant that underutilized space. A tenant representation broker will be able to help you work through this and may also suggest a space planner to help identify the best layout for your company.
Formula to Calculate Rent:
Rentable Square Footage x Annual $ per Square Feet= $ Per Year
Divided By 12= $ Per Month Divided by Rentable Square Footage=Monthly $ Per Square Feet
Step #3: Tour Commercial Office Spaces for Lease
Where to Start Your Search?
Tenant representation brokers negotiate a lease on your behalf and will walk you through the entire leasing process from start to finish.
If you are a startup or do not have a lot of capital to hire a tenant representation broker, it can be overwhelming to begin looking for commercial office space available for lease. Two of the most popular sources for finding commercial office space online are Craigslist and LoopNet. Both of these websites will provide basic details about the office space for rent and will always include contact information for the Property Manager broker. Once you find an office space that you are interested in looking at in-person, call the Property Manager broker from the Criagslist or LoopNet and schedule a tour.
Another option for finding available commercial office space for lease is by driving around the city. By now you should have determined a general part of town where you would like to set up your new office. Take a drive around that area and make a note of the contact information on any building signs advertising commercial space available. Once you are back in your office, call to schedule a tour of those spaces.
Prepare a Checklist
Understanding commercial office leasing markets takes a lot of research and can be a daunting endeavor. A tenant representation broker will present you with the market data and a list of properties for you to tour based on your predefined specifications of location, size, local attractions, and building amenities.
Ask for a Property Analysis sheet to compare each building and breakdown of associated costs related to leasing each specific space. This will be a great tool to help you find the best space that meets your criteria.
If you have decided to tour commercial office spaces for lease without a tenant representation broker, make sure you are organized before scheduling tours. Create a tour form listing all of your questions about each specific space and include a checklist of building requirements and amenities so that you can quickly take notes during each showing of a commercial office space.
To streamline the process, be sure that all partners and decision-makers can attend the scheduled tour times. At the beginning of the tour, ask the Property Manager for a floor plan of the office space so that you have your bearings while performing the walkthrough. Do not forget to take pictures of the building as well as the office space to help you remember the location and space.
Remember, if you’re looking in a popular market, chances are other companies are looking at the same commercial office space. Be efficient in your search and make decisions quickly, don’t drag it out. If you do, there’s a good chance space will be gone and you will have to start over.
Some of the important questions to ask when touring office space:
- How old is the building?
- When did the last renovations take place?
- What do conference rooms look like and are they shared between tenants?
- How many parking spots will be allocated to your company?
- Is there a janitorial service?
- Is there security and what are the access hours for the building?
- How is the HVAC handled and what are the expenses?
- Is there any scope for expansion in the future?
- What are the common areas and how are they maintained?
- Who looks after complaints and requests for repairs?
- How active is the Property Manager when it comes to complaints?
- What is the policy regarding late payment of rent?
- Is the property managed professionally?
Letter of Intent (LOI)
Once office space has been selected your next step is to prepare an LOI or Letter of Intent. This is where your tenant representation broker would present the document to the Property Manager. An LOI sets up essential proposed terms for a lease including rental rate, duration of the lease, renewal options, etc. It’s best to get most of the details worked out in the LOI so once you transition to a lease agreement there are no surprises and you can move quickly through the negotiation process. You can go here to see more samples and tailor a Letter of Intent for your particular situation.
Step #4: Review & Negotiate the Commercial Lease Agreement
Decide Length of Lease
Property Managers give preference to tenants who sign long term lease agreements, especially if the negotiated contract holds the Property Manager responsible for most or all of the operating expenses. Signing a longer-term lease will give you more flexibility when negotiating other clauses of the contract.
If you’re looking to negotiate concessions from the Property Manager it would be best to sign a longer-term lease.
Once the contract is in place it will be hard to break the lease so make sure you have a termination option in place. Investors looking to buy commercial buildings are more likely to spend more money on a property when they find that most of the tenants have signed a long term lease agreement.
If you can’t sign a long term lease, just keep in mind that shorter terms usually come with higher rental rates and more expenses.
Another option to consider is signing a long-term lease with the option of subleasing the space in the case that you need to move out prior to your lease expiration. You will be subject to the terms of the master lease with the Property Manager, so carefully review this part in the contract and look for increased operating costs.
Commercial Lease Clauses
You have seen the office space and you are happy with everything from the location and the condition of the property to the monthly rent that will be charged. However, there are still many important details to clarify from the Property Manager before you make the commitment and sign the commercial lease agreement. Most of these remaining items are usually covered in the form of clauses in the lease agreement. It is prudent to know your rights and responsibilities concerning all parts of the contract so that you are able to make an educated decision.
Repairs, Improvements, and Rent Escalation
Building repair costs are always a top concern for Property Managers. Depending on the type of lease agreement the Property Manager may include clauses in which repairs and improvements expenses pass through to the tenant through rent escalations.
Property Managers typically worry about their costs of repairs increasing as their profit declines. This is why Property Managers are always in favor of NNN leases where they charge a base rent plus an additional amount for upkeep and repair of the property. In cases where a Triple Net lease does not make sense, Property Managers prefer to go for a lease that transfers increases in expenses on to their tenants. This is termed as ‘Pass-Through Escalation’.
This clause can give the Property Manager an excuse to spend more rather than think of ways to save on repairs. If this is the case, one way to prevent overspending on repairs is to use an Expense Stop. Under this clause, it is the Property Manager who is required to pay the first part of the increase in the cost of repairs but after a certain level, the burden falls on the tenants.
If the office space needs improvement to fulfill the requirements of the tenant, Tenant Improvement Allowances are included in the lease agreement.
Tenant Improvement Allowance (TI)
This money is provided by the Property Manager to allow the tenant to carry out improvements such as changes in layout, flooring, painting or even wiring for data connectivity. Property Managers oversee the work process and issue payment after invoices and work done to the space have been reviewed. Property Managers tend to allow TI only in cases of tenants having good credit and those who sign long-term leases.
The Options term allows tenants to negotiate a renewal or an extension of their lease term by giving advance notice to the Property Manager. Typically anywhere from 60-120 days advance written notice is required by a Property Manager, but the exact specified timeframe will be stated in the lease agreement. There is also an expansion option that allows tenants to add extra space to their existing office, which is commonly referred to as the Right of First Offer or the Right of First Refusal.
- Renewal Option: Allows a Tenant to EXTEND a Lease
- Expansion Option: Allows a Tenant to ADD Space
- Right of First Offer: Allows Tenant to Negotiate for ADDITIONAL or ADJACENT space
- Right of First Refusal: Allow Tenant an opportunity to a SPECIFIC DEAL the Property Manager is offering someone else.
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In Case of Parking
When reviewing the commercial lease agreement it is important to define your allocated parking spaces. It is advantageous to negotiate a ratio of number of parking spaces per rentable square foot (ex: 4 parking spaces per 1,000 square feet of rentable area of the leased premises) as the parameters for your parking agreement. That way if you choose to expand your commercial office space, then you will automatically be entitled to more parking spaces.
The number of parking spaces negotiated in the lease agreement is typically allocated to your employees. What happens if you have visitors to the office? Will you be charged extra? It is important that these details are written into the contract so that you are not met with a surprise cost.
In Case of Customization
You love the location, the building, and the amenities but you are not happy with the layout and the design of the office space. Will your Property Manager allow you to modify the office space according to your business requirements? This is a very important factor, because if you make modifications that are not allowed the Property Manager can file a civil case against you.
Before you sign, read the lease agreement carefully to find out if your Property Manager allows you to customize the office space to match your needs. If you have any questions you can always ask the Property Manager for clarification.
In Case of Insurance
Most Property Managers require their tenants to show proof of General Liability and Business Insurance at time the commercial lease agreement is signed. You should already have these policies in place as a standard process of doing business, but you will need to work with your Insurance Agent regarding any changes in coverages due to relocation. These changes could ultimately impact your yearly premium, so take this into consideration when preparing your final budget.
In Case of Relocation
In certain cases, tenants need to be relocated to another similar space inside the same building. Read this clause carefully to know who pays the cost of moving if you need to relocate during the lease term.
In Case of Assignment
Many Property Managers allow tenants to assign their lease agreement to a new tenant if they need to move out of the space. This is called subletting and will determine if and when the current tenant can re-let part of or the entire space to someone else. This is usually done by giving written notice to the Property Manager for approval. Keep in mind the Property Manager may try to negotiate a percentage of the office rent collected from the subtenant.
In Case of HVAC Use After Business Hours
The Property Manager will have specific hours of operation set for the commercial building during which the HVAC system will be in operation. If you intend to use your leased office space outside of the predefined building hours of operation, then you will need to read this clause carefully to determine if you may incur additional costs to your monthly expenses.
In Case of an Early Exit
You find a hidden gem, set up shop, and begin running your business. But sometimes things change. Does your lease agreement allow you to break the lease and walk away from the office space? Are you comfortable with the fees and penalties that are charged to you in such a scenario? This isn’t usually something that tenants foresee or even want to think about beforehand, but it’s good to have some kind of termination option in place.
A property inspector can help you check out the property before you sign the lease or renovate. Your broker or representative will be able to provide a reputable reference for you.
An unbiased property inspector, one who has a credible record will be able to tell you about the immediate renovations as well as future renovations. They will also be able to tell you if there are any structural damages to the property or not. An inspector will also be able to help you get the wirings and the plumbing checked as well.
Many states and cities require an inspection by law, always know what you are getting into. If you are moving into a new city, make sure you become familiar with the codes and permitting office and understand the rules going forward with regards to renovations.
Step #5: Lease Negotiations & Final Signatures
If you are negotiating a commercial office lease for the first time, you can easily become overwhelmed by the numerous terms and conditions presented in a lease agreement. Focus on terms involving rent, expenses, improvements, and late payment as these are the main parts for any negotiation and lease contract. Again, this is where a Tenant Representation broker would work on your behalf and negotiate the best deal for you.
It is important to note that a tenant can negotiate the terms of the lease agreement and extract certain concessions from the Property Manager such as an advance deposit, tenant improvement allowance, rental rate increases, or any other term mentioned in the lease agreement. The ability of the tenant to secure concessions depends upon negotiation skills as well as the financial condition of the Property Manager and market conditions. If the building is in a prime location and has high occupancy rates, it might be difficult for you to negotiate any kind of concessions.
Why You Need a Tenant Representation Broker
It doesn’t matter whether your business is big or small; finding a desirable office space and then negotiating a commercial lease can be daunting. Between the location, the building, the amenities, and the contract terms and clauses, there are innumerable variables to consider. Your office becomes the face of your company so it’s prudent to invest the time and effort to get the best office space possible.
Tenant Representation Brokers are working in the market every day and will be able to easily compile a report of available properties based on your specifications. It could take several days, or even weeks, to create this report on your own. By the time you are ready to embark on building tours, some of those properties may no longer be available.
In addition, Tenant Representation Brokers usually have relationships with the commercial property managers in town, which can come in handy when negotiating final contracts.
At CXRE, we are equipped with full market knowledge of Houston commercial properties and have access to proprietary software only available to commercial real estate professionals. We also have current data on real estate trends, rental rates, lease comparables, and classes of properties in the neighborhoods you are interested in. We value high-quality talent, superior tenant-centric services, and unmatched deal speed to help you negotiate the best commercial office lease possible. Our team of experts is ready to help you find your next office space today!