Let’s face it, rent can drastically impact a company’s bottom line.  In fact, for most companies, commercial real estate leasing expense is typically the second-largest expense following salaries.     With many employees working remotely or on a hybrid basis it is more important than ever to lease both the right amount of space and the most efficient space possible.  Below are some tips to help you determine how much commercial office space you really need.

Poll Key Personnel

To determine how much space is necessary, begin by polling key personnel and the heads of various divisions to determine how many employees are actually coming in, on what days, and how they are using the space.  Next poll the same personnel to determine how your existing space functions.  There should be a discussion regarding your current layout, what works well and what should be modified based on changes to your organization, industry, etc.  Size is a key consideration, but sometimes less is more if you are providing optimal design efficiency.

Controlling Rental Costs

There are essentially two ways to control rental costs:

• Minimize the cost per square foot; and/or
• Minimize the amount of space leased. Many companies focus solely on price per square foot and end up leasing excess space.

Even in a market favoring tenants, there is a limit to how low a rate a landlord will offer.  By reducing unnecessary office space by 10 or 15 percent, your company can significantly reduce the total rent amount.  Tenants often find that a high-quality office building ends up saving them money even if the cost per square foot is higher.  This is because modern, higher-quality spaces are created with ergonomic principles designed for greater space efficiency.

Benchmarks: Square Footage Per Person

Use a benchmark of 200 rentable square feet per person to get started.  That is equivalent to a 14×14 bedroom.  Considering that a mid-sized cubicle is only 8×8 or 64 square feet, 200 might sound excessive, but that includes space for hallways, walkways, conference rooms, and a kitchen.

If your budget is tight, reduce the square footage to 125 square feet for a high-density open layout.  Feel free to visit www.mobiliticre.com and click on the Resources tab in the top right of the home page then click on Office Space Calculator.  This will give a rough idea of how much space you will need.  Note you will need to know the common area factor for the building (See below).

Related: Do These 5 Things Before a Major Office Move

Have a Furniture Dealer Lay Out The Space

It can be difficult to imagine how much space your staff needs.  Fortunately, there is a free and easy solution. Most potential landlords can provide you with an empty architectural floorplan or CAD file.   This floorplan can be taken to an office equipment dealer, who will lay out an office plan for free in the hope of earning your future business.  The floorplan can then be manipulated on a computer using an image editor like Photoshop.

Review Loss Factors to Compare Each Building’s True Overall Cost

One of the most significant areas impacting the size of space you need and therefore your overall cost of occupancy has to do with the loss factor of one space versus another.  With the exception of single-tenant office buildings, flex or industrial space, most multi-tenant office buildings have a loss factor.  Most commercial leases define the leased premises in terms of “rentable” square feet. Tenants often focus on the rental rate for those square feet. However, it is important to understand how the rentable square footage number was calculated and to compare potential spaces on a true “apples to apples” basis by calculating the “usable” square footage of a space.

Comparing Usable to Rentable Square Footage

While a lease will commonly only reference the rentable square footage of the premises, the tenant’s broker should also determine the usable square footage of the premises. Usable area is considered the space that a tenant can personally occupy (as opposed to shared common areas).

Useable square footage is measured from the interior wall to the interior wall of the leased premises. Usable square footage does not include common areas such as shared restrooms, the building lobby, stairwells, janitorial rooms, mechanical rooms or hallways. For tenants leasing an entire floor or multiple floors, the usable square footage of their premises would include the hallways and restrooms exclusively serving their floor(s).  The rentable area of premises is broader than the useable area and includes a tenant’s share of space in the building deemed beneficial to the tenant even though the tenant does not have exclusive possession of such space. The rentable square footage of leased premises includes the tenant’s share of the building’s common areas such as lobbies and other non-rentable spaces such as mechanical areas, bathrooms, and staircases.

Rental Rates

Rental rates are typically quoted on the basis of rentable square footage. Operating costs, taxes and insurance costs are usually based on rentable square footage as well. The increase in a premises’ square footage above the area that a tenant exclusively controls is often referred to as the “load factor,” “loss factor” or “add-on factor.”  For example, consider a building that contains 300,000 square feet of floor area, of which 260,000 square feet is an area that can be used and occupied by tenants and 40,000 square feet is the common area (common restrooms, lobbies, hallways, utility rooms, etc.).

The 40,000 square feet of the common area is spread over the 260,000 square feet of usable area to determine the building’s loss factor. In this case, the building’s loss factor would be 15% (300,000/260,000) or 15%.  A 15% load factor would mean that a space with a usable area of 30,000 square feet would have 34,500 rentable square feet (30,000 x 1.15 = 34,500).  A building with a low load factor can save a tenant money (or provide a tenant with more usable square feet) as compared to a building with a high load factor.  The implications of a higher load factor are easiest to observe through an example. A tenant is considering two offices in two different buildings.

Option A is an office of 5,000 rentable square feet in a building with a loss factor of 20 percent. Option B is an office of 5,000 rentable square feet in a building with a loss factor of 15 percent loss factor. Both options specify 5,000 rentable square feet and an identical rental rate. However, a savvy tenant broker would calculate the usable square footage of Option A versus Option B. Option A contains only 4,166 usable square feet while Option B has approximately 4,348 usable square feet. While the rent for both locations is the same, the tenant gets an additional nearly 182 square feet of usable space in Option B.

Tenants should be careful to compare the rental rates of prospective premises on the basis of usable area, since that is the space that they will have the exclusive right to use and occupy for their business. An “inefficient” building with a high loss factor can cost a tenant more per usable square foot than a tenant realizes, but a tenant may determine that a higher loss factor is worth the added cost due to the larger, more elaborate lobbies and common areas that some high loss-factor buildings provide.  The loss factor in most office buildings ranges from between 10 and 20%. Next week we will discuss things you can do to ensure that your commercial real estate office tour is as productive as possible.

Office Space Calculator

At Mobiliti CRE we focus 100% on representing tenants with relocations, expansions, contractions, and subleases throughout Tampa Bay and the entire West Coast of Florida.  We also assist businesses that are looking to purchase office, medical office, flex and industrial Reach out to us for assistance with all of your commercial real estate needs at (813)-300-2227 or email us at pam@mobiliticre.com

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The post How to Right Size Your Office Space and Improve Your Bottom Line appeared first on Mobiliti CRE.

Assuming you have hired an attorney, you should also review the lease and have a basic understanding of the following key legal points.  Understanding these points will allow you to better communicate with your attorney.

Avoid Personal Liability.

If at all possible, avoid signing a personal guaranty. If your business fails for any reason, you will be personally liable and would wind up in personal bankruptcy if you cannot pay off the balance of the lease payments.

Security Deposit.

Virtually all landlords will require some form of a security deposit for your lease. The security deposit can be either in the form of cash or a letter of credit. The exception to this rule is for corporate tenants with exceptional credit who may not have to put up a security deposit. Privately held companies usually have to put up at least two months’ rent as security. The exact amount will depend in large part on the amount of money being spent by the landlord for improvements and the tenant’s credit. In some instances, the tenant may be able to negotiate a burn-down provision where the security deposit declines over the term of the lease.

Non-Disturbance Agreement.

This provision states that if the landlord should default in the payment of its mortgage and lose the building, the lender must recognize you as a tenant. This provision is very important to tenants signing long term leases and expending significant amounts of their own funds for tenant improvements. However, this provision is typically only available to tenants leasing large blocks of space.

Use.

This provision describes the acceptable activities that can occur within the space. It is important to describe all of the activities you will be performing in the space. If there is any doubt that your use could violate local zoning or land use regulations, it’s important to require the landlord to represent and warrant that your use is permissible and to provide that you can terminate the lease without penalty if your use violates any land use or zoning codes.

Rent Commencement.

The rent commencement date should provide for the possibility that there may be a delay in finishing tenant improvements and should provide for a delay in payment of rent if that happens.

Common Area Maintenance and Operating Expenses.

Common Area Maintenance (CAM) and Operating Expenses are sometimes used interchangeably but they are not the same thing. CAM refers to expenses associated with the maintenance of common areas of the property. CAM is a subcategory of operating expenses.

Besides CAM, operating expenses typically include taxes, insurance and may include other non-separately metered items such as janitorial. It is important to understand these charges in order to ensure that the tenant does not end up paying for items that should be paid for by the landlord or only paid by tenants receiving a benefit from the expense. This portion of the lease is typically heavily negotiated and may include the following tenant-friendly provisions:

• Exclusion of capital expenditures or if not excludable amortization over a reasonable term,
• Capping increases in common area charges,
• Capping increases in taxes in the event of sale of the building,
• Excluding payments for major repairs in a short-term lease,
• Tenant’s right to audit,
• Cap on management and administrative fee,
• Exclusion of landlord’s costs of doing business,
• Exclusion of costs related to the landlord’s wrongdoing,
• Exclusion of costs that don’t benefit tenants equally or are caused by other tenants, and
• Gross up expenses for buildings with low vacancy.

Tenant improvements.

Prior to move in most spaces will need to be built out or retrofitted for the tenant’s specific use. The landlord typically provides a tenant improvement allowance to cover some or all of the costs of the build out or retrofit. Negotiating the tenant improvement allowance is one of the most important provisions in your lease. In negotiating the allowance, the tenant has two main goals: (a) get as large of an allowance as possible and (b) maintain as much control over the buildout as possible. There are two types of tenant improvement allowances (a) turnkey buildout and (b) stated dollar amount.

Turnkey Buildout.

With a turnkey buildout the landlord pays all of the costs associated with a buildout based on approved design and agreed upon rental rate. Turnkey buildouts work well for smaller leased premises or for simple buildouts requiring carpet, paint, and moving a few walls. While a turnkey buildout seems like a risk-free solution for the tenant, this option is not always the best choice for the tenant.

A major problem with a turnkey buildout is that the landlord is going to add a significant amount to the estimate to cover contingent costs in order to ensure that the landlord doesn’t end up paying more than the amount estimated. This contingency can amount to 25-30% of the entire bid! The more efficiently the landlord manages the buildout the more it can save. This can encourage the landlord to cut corners. Also, with a turnkey buildout, the tenant relinquishes control of the process. This can be alleviated somewhat by negotiating an extensive work letter detailing the materials and work to be done.

Stated Dollar Amount.

A stated dollar amount allowance provides the tenant with a specific predetermined amount which usually includes architectural, engineering and buildout costs. With a stated dollar contract, the tenant maintains control over both the quality and timing of the process. In order to maintain as much control as possible, I encourage tenants to get the landlord to waive its management fee for the project and I encourage the tenant to select their own project manager to oversee the process. Finally, if possible, negotiate that any costs over and above the stated amount be amortized into the rental rate over the term of the lease.

Responsibility for HVAC Charges.

For multi-tenant office leases, the Landlord is generally responsible for maintaining and/or replacing the HVAC. It is important that the lease spell out standard hours of operation. For a tenant operating outside those standard hours, additional air conditioning is typically charged by the hour and is often marked up above the landlord’s actual cost. Tenants taking a significant amount of space may be able to negotiate these charges down. Tenants in single-tenant properties, industrial and flex properties are often responsible for repair and sometimes even replacement of the HVAC units after occupancy. In these instances, it is important to have the units inspected prior to occupancy and any repairs or replacement should be paid by the landlord.

Lease Flexibility.

It is important that your lease allow you the greatest flexibility possible in terms of your ability to expand or contract over time. The longer the term of your lease, the more flexible it will need to be. The following provisions can all contribute to increased flexibility.

Lease Term.

Although it seems counter-intuitive, a longer-term lease may actually be a less risky proposition than a short-term lease. For example, if you sign a seven-year lease and you need to sublease at the end of year three, you still have a four-year term remaining and that is still attractive to a new tenant. However, if you sign a five-year lease and need to sublease at the end of year three, you will only have two years left.

Many tenants will not want to go through the hassle of moving for a two-year term and you may not be able to sublease the space for the remainder of the term. An additional issue to consider is the prevailing economic climate when you sign the lease. When economic conditions are strong, the cost of real estate is at the high end of the cycle. Signing a long-term lease in a strong climate could lock you into a high rent lease for years to come.

In this type of climate, it’s better to sign a shorter lease. Conversely, during a recession lease costs are at the low end of the cycle. This is typically a good time to sign a long-term lease. Another factor to consider is the company’s projected growth. A startup company that expects to grow rapidly may not want to sign a long term lease. All of these factors must be considered when selecting a term.

Lease Termination and Contraction Options.

A lease termination or contraction option can be an excellent way to achieve lease flexibility. Landlords are not fond of these options and they can be difficult to obtain. Most landlords will not even consider a termination or contraction for a lease term less than seven years. In addition, these options are not free. At a minimum, the landlord will require payment of unamortized costs associated with tenant improvements, brokerage fees, and rent concessions for the amount of space terminated. These options can be expensive, but they offer significant flexibility. For example, if you sell your business and do not want to continue to be responsible for a subtenant’s default, a termination option is very helpful.

Expansion Options.

As your company grows you may discover that you need more space. Rather than negotiating a new lease, you may be able to build a series of expansion options into an existing lease. Ahold option gives you the right to take over another space in the building at some point during the lease.  A right of first offer will give you a “first look” at any space that opens up in the building. A right of first refusal requires the landlord to give you the opportunity to rent a particular space in the building before offering it to a third party.

Renewal Option.

A renewal option in a lease is a great asset to the tenant. This clause allows you to extend a lease after the initial term has ended and gives you a much easier way to negotiate when the time comes. The notice period of a renewal defines how far ahead of time it is necessary for you to inform the landlord that you wish to renew. Try to negotiate at least 12 months so that you have time to consider other options. Many renewals provide that they will be renewed at “fair market value”. The term fair market value must be defined. The goal is to have an objective third party means of determining fair market value. Also, it’s important that the fair market value take into account the tenant improvement allowance and concessions the landlord would have to offer a new tenant.

Assignment and Subletting.

Circumstances may arise in which it is necessary for a tenant to vacate their space early. In such instances, an assignment or sublease is a very beneficial provision to have. An assignment differs from a sublease in that an assignment transfers the original tenant’s rights and obligations under the original lease to a new tenant. The original tenant is completely off the hook.

With a sublease, the original tenant remains liable for lease payments in the event the subtenant defaults. Landlords prefer subleases because then they have two tenants liable for rent. The landlord will typically only grant automatic assignment rights to affiliates or successors of the original tenant. With either a sublet or an assignment, the Landlord will want the right to approve the creditworthiness of the subtenant or assignee and the terms of the sublet or assignment. It is very important to negotiate that the landlord’s consent will not be unreasonably withheld.

If possible, avoid any requirement that you offer the space first to the landlord. This is known as a “recapture provision”. If the landlord does have the right to recapture, try and limit the time frame for recapture. Also, try to negotiate the right to offer the space to other tenants in the building. Finally, it’s crucial that you be able to sublease your space for less rent than that being offered by the landlord.

At Mobiliti CRE we focus 100% on representing tenants with relocations, expansions, contractions, and subleases throughout Tampa Bay and the entire West Coast of Florida.  We also assist businesses that are looking to purchase office, medical office, industrial, and retail space.  Reach out to us for assistance with all of your commercial real estate needs at (813)-300-2227 or email us at pam@mobiliticre.com

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• How to Maximize Tenant Renewals
• Tips for Renegotiating Rent Due to COVID-19
• Having Your Own Buyer’s Representative Can Save Money
• 11 Tips for a Successful Real Estate Tour
• Cost Saving Strategies to Reduce Rental Expenses
• Determining How Much Office Space You Need

The post How to Make Sense of a Commercial Real Estate Lease appeared first on Mobiliti CRE.

The time required for a successful move depends on the size of the space required and the complexity of the new space. For an office user with 10,000 or more square feet, it is best to begin the process within 18 months prior to the expiration of the current lease. It is critical to begin the process early enough to maintain leverage in lease negotiations and to be exposed to as many alternatives as possible.  Last week we discussed the importance of reviewing your existing lease prior to doing anything else.  Once you have done that it’s time to assemble the team, the timeline and the budget.

1. Choose a Team Leader and Make them Aware of Management’s Goals. Being the point person on an internal office move can require a substantial time commitment. The team leader should be made aware of this and may need to delegate some of their normal duties to someone else during the search process. In addition, it is imperative that the team leader receives clearly defined goals and instructions from all decision-makers involved. Often the best choice for a team leader is the CFO, general counsel, head of facilities or an office manager.
2. Assemble an External Team. The first step for the team leader should be to interview and hire a real estate broker. The broker can then assist in hiring other professionals such as architects, engineers, and construction managers.
3. Clearly Define the Role and Responsibility of Each Member of the Team. The roles of each team member should be clearly defined, and they should be held accountable.
4. Create a Project Schedule. The team leader, together with assistance from the broker, should create and maintain a project schedule that keeps everyone on track. The project schedule should outline each team member’s duties and should include key deadlines for completion and budgets. Staying on schedule will prevent you from moving too late and having to pay holdover rent or from moving too early and having to pay rent on two locations.
5. Establish a Preliminary Project Budget. The budget should address costs for construction, if any, professional fees, furniture, equipment, moving costs and any other costs not covered by landlord concessions.

Next week we will discuss the process used to determine how much space is needed.

At Mobiliti CRE we focus 100% on representing tenants with office relocations, expansions, contractions, and subleases.  We also assist businesses who are looking to purchase office, medical office, industrial, and retail space.  Reach out to us for assistance at 813-300-2227 or via email at pam@mobiliticre.com Here at Mobiliti CRE we assist both small and large investors as well as owner-occupiers with commercial real estate purchases.  

More Tenant Related Information

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• Cost Saving Strategies to Reduce Rental Expenses

The post Thinking About an Office Move? Do These 5 Things First appeared first on Mobiliti CRE.