Leasing Guide

A “prebuild” or prebuilt space is a space that a landlord has renovated and built out in order to make it more appealing and readily available to a prospective tenant.

Typically vacant spaces will remain in the condition the previous tenant leaves them. Once ownership receives an offer, the tenant will either request work to be done to the space, ask for free rent or a cash allowance (or “TI”) to do their own work, or move into the space as-is.

The advantages of the traditional approach is that ownership can build the space exactly how the tenant wants it and ownership doesn’t spend any money in the meantime. The advantage to the tenant is they can get the space exactly how they want it.

There are a couple reasons an owner would prebuild a space:

• So it shows better. It’s one thing to tell a tenant how a space could look, it’s another thing to update it with high end finishes and eliminate the need for anyone to use their imagination (or architect).
• To cater to tenants needing immediate occupancy. If a tenant needs space in two weeks, they are not going to be able to wait for an owner to do a full build-out. This gives a prebuilt space a competitive advantage for tenants that need space asap (who often have a stronger sense of urgency and are more motivated to make a deal)
• To make efficient use of time. While a landlord’s space is vacant and they are waiting for a tenant, if they use that time to renovate the space, they might not actually be “losing” that time, if it reduces the time it takes from lease signing to tenant occupancy.
• Achieve higher rents. Landlords can typically get higher rents on prebuilt spaces since they look better (wouldn’t you pay more for mint, restored car than an old broken car of the same year that the seller promises to fix up?)
• Rent the space faster. Using the same car example, wouldn’t the restored car sell a lot quicker?

Reasons not to prebuild a space:

• Save on out of pocket expense. Even though a landlord might (or in some cases probably will) need to build the space for a tenant later, they are less motivated to spend the money without anyone willing to pay rent as soon as it’s completed.
• What if the incoming tenant is not that picky and doesn’t need high end finishes?
• Less flexibility. What if the incoming tenant wants a different layout than you spent money building? If you just built 6 glass offices and the incoming tenant wants a wide open space for their trading desks, you are either turning away a tenant or wasting all the money you spent building those offices. A less extreme example would be if you built 6 offices and the tenant only wanted 4.

Landlords need to see financial information from prospective tenants to determine if they want them in their buildings. The stronger a tenant is financially, the more attractive they are to the landlord. Typically, if all other aspects are equal, landlords will choose the tenant that is stronger financially. If a potential tenant doesn’t have financials that are appropriate for the price space they want, a landlord will either: reject the tenant or ask for a personal guarantee.

Landlords also use a tenant’s financials to determine the security deposit they will require for the lease.

The standard documentation requested is the first 3 pages of the last 2 years of the company’s tax returns. If the company is a start-up or the tax returns are not a good indicator of the company’s standing, a prospective tenant should include other information such as bank statements and statements certified by their accountants such as profit/loss, summary of assets, etc. (basically anything that is evidence you are a strong company).

Additional Charges:

Buildings usually add charges to base rent. The primary additional charge is electricity.

This is billed in one of three ways:

1) Direct – You pay your own electric bill (this is usually the most desirable)

2) Submetered – there’s a meter in your space that belongs to the building (not the electric company) and they send you an electric bill along with your rent every month. They will often add a surcharge for this (for example: 5-10% on top of your usage)

3) Per square foot/per year: this is usually between $3 and $3.50 per square foot per year regardless of your usage. For example, in a 1000 sf space with the electric at $3.50 psf, the monthly electric charge would be:

$3,500 per year/12 (months) = $291

Other charges tenants are frequently held responsible for are water, sprinkler, sewer, doorman, security guard, and garbage removal. These are usually billed as flat monthly charges.

For example, a 2000 sf office could have a $40 water and a $40 sprinkler monthly charge and the tenant would have to pay the refuse removal company $30 per month for their services

New York City real estate taxes are assessed every July. Each building is assessed a different tax every year. Sometimes the tax on a building does not go up, but it usually does. Landlords can’t predict how much their real estate tax will increase so they pass along the charge to their tenants.

As an example, a tenant occupies 5000 sf in a 250,000 sf building. Their proportionate share of the real estate tax increase would be 2%. If the base tax year is 2008/2009 (July to July) and real estate taxes in the building increase $10,000 in July 2009, the tenant would pay/reimburse the landlord $200 (2% of $10,000). It is not uncommon for a landlord to spread out these payments and charge the tenant in monthly installments instead of one lump sum (especially if it’s a high increase).

It is important to keep in mind that tenants are responsible for the increases above their base year, not the previous year. Using our past example of the $200 tenant charge in July 2009, if in July 2010, the real estate tax on the building increases $20,000, the tenant would now owe $600 in 2010 ($200 + $400 because the real estate tax is $30,000 more than it was in the base year 2008/2009).

So if there is a high increase in the second year of a five year lease, the tenant will also be enduring the effects of that in every year following.

Landlords also sometimes hold tenants responsible for increases in fuel charge, which works the same way, but is typically a much less substantial amount.

Landlords usually will require tenants to accept the current tax year as the base until it is completely over. But if, for example, you are negotiating a lease that begins in June 2009, you should at least try to negotiate a base tax year of 2009/2010 (since the 2008/2009 tax year is almost over). This will not only help you avoid paying your share of the increase at the beginning of the lease, but the result of that increase every year afterwards.

Loss factors are calculated by subtracting the usable area from the gross/rentable area and dividing by the rentable area. (Rentable SF – Usable SF)/Rentable SF = Loss Factor.

Loss factors and usable sf are typically not disclosed by landlords.

The gross or rentable sf (before loss factor) is always the square footage advertised on a Manhattan office space.

The following gives a great background on loss factors.

Once upon a time, many years ago when twelve inch rulers were inflexible, a hypothetical New York City landlord stood in the vast 10,000 square foot hypothetical lobby of his eleven story hypothetical office building, watching his hypothetical tenants arrive for work in the morning.

Buyers of commercial property, particularly buyers of Manhattan trophy office buildings, generally don’t question 25% full floor Loss Factors notwithstanding the fact that Manhattan office buildings come in all shapes and sizes with vastly different floor plate configurations, load bearing column density, width of perimeter HVAC convectors convector: see heating.
….. Click the link for more information., etc. Imposing a 25% full floor Loss Factor on an inefficient floor plate translates into asking a tenant to pay rent for a lot of inefficient square feet.

2) According to Real Capital 
Real capital
Wealth that can be represented in financial terms, such as savings account balances, financial securities, and real estate. Analytics, the following statistics apply to 2005 sales of Manhattan commercial properties worth a minimum of $5 million: $13.1 billion of total sales, 138 properties, 30.6 million square feet, $426 average price per square foot, 5.24% average cap rate.

3 (Rentable Area less Usable Area) divided by Rentable Area equals the Loss Factor.

By David L Hoffman, JR

Executive Managing Director, Colliers ABR, Inc

A good guy clause is a limited personal guarantee. The distinction between a good guy clause and a traditional/full personal guarantee is that in a good guy clause an individual’s personal liability ends when the space is vacated. Therefore, if a company dissolves and the space is vacated, the individual is absolved of any further responsibility.

• Doctor or dentist
• Spa
• Hair salon
• Modeling agency (casting calls)
• Physical trainer
• Teaching facility/classroom
• Real estate office
• Fashion designer (sample sales)
• Dance studio
• Pilates
• Yoga Studio
• Karate

During my first few months as a broker, I remember negotiating on a space in Midtown West and discovered the landlord’s broker required a deposit (of about $2000) from the prospective tenant in order to draft a lease.

I was disappointed and immediately asked if we could waive or at least lower the deposit amount. We ended up not seeing eye to eye on all the terms of the deal and never getting to the point of requesting a lease, but I walked away cautioning myself to be careful of bringing other tenants to the building because of the lease deposit.

A few years later I have instituted a lease deposit policy on some of my own listings. The vast majority of commercial landlords do not require any kind of deposit in order to send a prospective tenant a lease.  So wouldn’t I have a problem getting deposits from people?

Yes. Especially if they’re not committed to taking the space.

The reasons for the lease deposit are easy to understand:

• An attorney will charge an owner to draft a lease (and for any subsequent comments/changes)
• Owners typically put any other offers they receive on the back-burner once they have agreed to terms with a tenant.
• Often they will even discourage others from looking at the space

So the owner is making some commitment to the tenant (and spending a little money) and without a lease deposit, the tenant is free to back out of the deal at any time for any reason. This would cost the owner legal fees and cause him to potentially miss out on other interested tenants.

By asking for a deposit that is refundable in the event the tenant finds the legal terms of the lease unacceptable, but not refundable in the event the tenant reconsiders, the landlord knows the tenant is serious before spending money on the attorney and turning away other prospective tenants. They also receive compensation in the event the tenant backs out.

There are a few reasons a tenant would be reluctant to provide a deposit:

• They’re not sure they want the space
• They are deciding between more than one space and want to keep both in play
• They plan on negotiating further after they receive the lease (this is not considered an ethical practice and usually not tolerated regardless)
• Out of principle (since no one else is asking them for one)

The first three would all be good examples of how a landlord can use the deposit as a screening process. As far as the “Why should I have to give a deposit?” argument, a prospective tenant can usually appreciate the logic of why a landlord wants one.

They also gain some benefits. If a landlord has a deposit, the landlord is more confident about the deal, meaning they are less likely to show the space to others and are likely going to be more patient with the tenant. For example, if I didn’t hear from a tenant for 4 days after sending them a lease, I’d assume there was something up with the tenant and encourage a landlord to pursue other offers. However, if there was a deposit, I’d likely feel okay about it and let the tenant take their time since they’ve already committed.

They key is that a tenant should decide they want the space before they get a lease, not wait to decide until after they get the lease.

Here’s an example of a situation where I waived a deposit and lost a deal because of it. I had a small space at 36 West 44th street and two brokers submitted offers on the space with a couple days of each other.

Both tenants were willing to go very close to the asking price and in the range where the owner wanted to make a deal. The determining factor (as it usually is) was the track record of the companies and the amount of work each tenant was requesting.

We decided to go with the more established tenant that needed less work. We made the urgency of the situation clear to the broker and his tenant quickly signed the term sheet, but said he didn’t want to comply with the deposit because no one else needed him to.

We didn’t want it to be a dealbreaker so we moved on and I rushed our attorney to issue him a lease asap. After about a week of calling his broker and being told that the tenant will get back to us soon or that the broker is waiting to hear from him, the tenant finally admitted that was going to pass on the space and renew on his existing space unless we could drop the price from $40 psf to $25 psf.

Obviously, this was a ridiculous request and possibly an example of him planning to negotiate after he got the lease, rather than the surprise, last second development he made it out to be.

Obviously, my next call was to the other broker, but at that point, her (very serious) tenant had already locked up another space.

Had we stuck to our guns about the deposit, not sent the lease to the other tenant, and sent it to her (assuming her tenant would have complied with the deposit), we would have had the space rented (or at least had the first tenant’s deposit as a consolation).

I finished another deal in the same building last week. It was for a small space and with an international company so the lease negotiations took much longer than usual. I did receive a bunch of calls from other tenants that seemed like potentially great fits in the meantime. Had there been no deposit, I probably would have shown the space and presented any good offers to the ownership, tempting them to go with someone else or at least put more pressure on the other tenant to sign faster. Since we had their deposit, I just put them on a callback list and we ended up completing the deal without any unnecessary complications or added stress.

It’s important to understand that even though there may not be another interested party at the time you request the lease, there could easily be one the following day pressuring the owner for the space. The more certainty you give an owner, the less likely they are to show the space to other tenants and consider other offers.

To give another example of how a lease deposit simplifies the process of renting a space, a few years ago I was representing a landlord and we had three good offers on the same unit. The market was beginning to spiral downwards and we were worried about making sure we got the space rented asap.

The owner decided to send a lease to all three tenants and see who followed through (or who followed through first). In this instance, the strategy actually worked as two tenants were unresponsive and one signed the leases immediately.

However, I was put in a very stressful position and the other brokers and tenants certainly did not appreciate the approach (understandably). We also ran the risk of one of the less desirable tenants signing the lease before our top choice.

If we had prioritized which tenants we wanted most and offered them the lease exclusively provided they gave us a deposit, it would have gone smoother, we would have gotten our first choice and we would have avoided pissing off three brokers and tenants while accomplishing the same goal.

As a broker, now I am happy when I see that a landlord requires a deposit on a space my tenant wants. This way I know they are renting the space as soon as they get the lease, rather than worrying if they are just jerking me around for a few weeks and I can avoid the potential embarrassment of telling a landlord my tenant has backed out of the deal after we’ve already had the lease for a week. Or the irate phone calls from the landlord’s broker demanding that the tenant compensate them for their attorney’s fees or face a lawsuit.

Sometimes New York City landlords will consider giving a tenant a “cancellation clause” or “early termination option”.

A sublease is when a tenant (overtenant) rents their space, or part of their space, to another tenant (undertenant). Typically a sublease is for the entire period of time remaining in the overtenant’s lease, but can be shorter. Extensions can also be negotiated between the undertenant and landlord, especially if there is relatively short amount of time left on the sublease term.

Subleases must always be subject to the terms of the master lease between the overtenant and landlord. These terms cannot be changed, but the undertenant can, and should request a copy of the master lease to review as part of their due diligence.

Subleases are more common than assignments because in an assignment, the landlord absolves the overtenant of any responsibility. In a sublease, the landlord is still entitled to the rent from the overtenant even if the undertenant is not paying.

Here are some differences between leases and subleases:

• Subleases are usually not flexible on term. For example, if there are 26 months left on a lease, that will be the only possible term the overtenant will consider. They will not consider a 24 month term since it’s very unlikely (and difficult) to find another undertenant for the last two months. They won’t consider a 36 month term since they are unable to sublease the space for a longer term than they have the rights to the space.
• Subleases are almost always leased in as-is condition. Landlords will often do some renovations as part of a deal with a new tenant. Overtenants are usually not interested in the responsibility of construction work and are not as well-equipped to do it. In certain situations, especially if the space is not in move-in condition, undertenants can negotiate a substantial rent concession in exchange for sparing the overtenant from doing any work.
• Subleases are more often furnished than direct leases. This is because the existing tenant is (or was recently) operating out of the space, no longer needs or wants it, and therefore may no longer need or want the furniture that’s in it. Although new furniture can be expensive, it is difficult and not very lucrative to sell used furniture so if it can provide an incentive for an incoming undertenant, the overtenant is usually willing to give the furniture away with the space.
• Subleases can often require higher security deposits than direct leases. One important reason is to protect an overtenant from a subtenant defaulting with a very short term on the lease. For example, if an undertenant defaults with 10 months left on the term, the overtenant is most likely out of luck for the 10 months (whereas, if it was a direct lease, the landlord could lease it for any term length once the tenant defaulted). Another important reason is a holdover clause. Since most leases have a holdover clause that keeps a tenant responsible for 2-3 times the rent if they holdover, an overtenant needs to protect themselves from an undertenant overstaying their welcome and the landlord charging them as a result. This is especially important in a below-market sublease since the overtenant is being charged holdover rents on their higher rent, rather than the undertenant’s discounted rent.

and clarification on some common misconceptions about subleases:

• Subleases are cheaper than regular leases. This is true in some cases, but not always the case, especially if the subleases have an above-standard installation and if the market has picked up since the overtenant signed their lease.
• In a sublease, you pay the overtenant the same amount they are paying the landlord. An overtenant has the right to charge any amount more or less than the rate they are paying. They often will not reveal the amount they are paying the landlord and an undertenant is not entitled to know the rent an overtenant pays (but sometimes will know).
• Subleases are usually from companies that are desperate and about to go out of business. If a company is in bleak condition, they will typically dissolve and break the lease rather than sublease. It’s also risky for an undertenant to sublease from a shaky overtenant because if they overtenant defaults, the undertenant’s office is now in jeopardy and subject to the landlord’s discretion. Often, subleases are from companies that have outgrown their spaces (and are doing very well).

A Holdover clause is common in a commercial lease. Basically it states that if the tenant does not vacate the space until after the termination date, they are responsible for a specific amount of additional rent. A holdover penalty is usually between 2 and 3 times the last (escalated) rent.

At first glance it seems like a high number, but keep in mind that it’s hard to predict the real estate market.  If a tenant signs a 10 year lease starting at $10,000 per month with 3% escalations, they will be paying about $13,000 per month at the end of the lease. If the real estate market has gone up 60% over those ten years (certainly not unprecedented), the tenant could stay in the space on a month-to-month basis at a below market rent indefinitely.

It’s not unusual for a landlord and tenant to extend a lease for a few months after a lease for a rent that they both think is fair, but if the holdover penalty does not exist, the landlord is put in a bad position since the tenant has less of an incentive to be proactive or communicative about extensions.

The holdover penalty is also high primarily to discourage holding over and encourage tenants to be communicate if they need extra time, not to generate more profits for the landlord.

If one tenant’s lease ends on September 30, and there’s a prospective tenant that wants to sign a lease on the space for November 1, the landlord needs to be certain the outgoing tenant moves out on time or at minimum, tells him that they are not.

Holdover clauses can garner extra attention on below-market subleases.

Below is an example of a holdover clause:

In the event Tenant remains in possession of the Demised Premises after the termination of this Lease, Tenant, at the option of Owner, shall be deemed to be occupying the Demised Premises as a tenant from month-to-month, at a monthly rental equal to 200% of the sum of (a) the monthly installment of Fixed Rent payable during the last month of the term and (b) one-twelfth (1/12th) of the Additional Rent payable during the last year of the term, subject to all of the other terms of this Lease insofar as the same are applicable to a month-to-month tenancy.

If a tenant decides to rent a space, the first step forward is submitting a proposal or offer. The proposal should include:

• Information about the tenant’s business including website and financial information
• Monthly rent
• Lease term length
• Any work the tenant wants the landlord to complete
• Any rent concession
• Start date
• Security deposit
• Escalations
• Base tax year
• Additional monthly costs

Your broker can draft the offer and you can review it before they submit the offer to ownership. All offers should be non-binding . Unless time is of the essence or there is competition for the space, it is usually smart to send an initial offer that is a little too low to be accepted, but high enough to be seriously considered and garner a counterproposal.

There can be several rounds of counterproposals before an agreement is reached.

In New York City, landlords typically pay commercial brokerage commissions. If a tenant is ever looking to sublease their space, they should expect to pay a full brokerage commission unless they find someone to rent the space on their own.

It is expected that the outside/tenant’s broker receives one full commission (100%) and the landlord’s broker receives one half commission (50%). One full commission is typically calculated as follows:
 

• Year 1 – 5%
• Year 2 – 4%
• Year 3 – 4%
• Year 4 – 3%
• Year 5 – 3%
• Years 6-10 – 2.5% each

Each brokerage firm can have a different schedule, but they are usually a variation of the above schedule. Commission is usually paid on base rent only, not annual escalations. So for example, the commission on a 5 year lease is equivalent to 19% of one year for the outside broker and 9.5% of one year to the representing broker.

There are some brokers that will offer commercial spaces on a reduced commission basis, but most tenant brokers, especially good ones, will not take their tenants to properties that don’t pay full commissions. Basically, if there are 5 properties that match their tenant’s criteria and 4 of them are paying twice as much commission as the “cobroke” listing, why would the tenant’s broker show the property that is only paying them half the amount?

If the landlord’s (or overtenant’s) broker finds a tenant without the assistance of the outside broker, then they receive one full commission.

Short for “New Building Installation”, this refers to when a landlord is providing a new build-out on a space for an incoming tenant.

Otherwise referred to as “free rent”, the rent concession is a period of rent abatement given to an incoming tenant. Rent concession are most often awarded to tenants when a space needs considerable work and the landlord is not renovating it, but providing a rent concession to help the tenant offset the construction costs.

However, it is not uncommon for landlords to offer a rent concession on built spaces as an incentive for tenants to rent space from them. Like rent prices, rent concessions given are heavily influenced by the state of real estate market.

On a given space, you can usually get more free rent on a longer lease. Short leases typically do not provide any free rent period unless there is considerable work that needs to be done to the space.

Once a landlord and a prospective tenant have agreed to terms, the landlord will draft a lease a send it to the tenant to review, make changes (to the legal terms, not business points), and execute. This process can be immediate or can take months depending on the simplicity of the deal and how quickly the landlord, tenant, and their attorneys act.

On a straightforward deal for a relatively small space, the landlord will expect the tenant to sign the leases within a week or two. The landlord will be more patient if the tenant is actively asking questions or making changes to the lease than if they are unresponsive for a week and a half.

Typically, when a landlord will only send one tenant a lease at a time and will not entertain other offers while they are waiting for the signature. However, if the tenant is unresponsive or attempting to renegotiate the business terms, the landlord may revert to back up offers or encourage other tenants to look at the space.

If you are looking for space and your desired space has a lease out for signature, you are basically on hold. Sometimes tenants or landlords have a change of heart and it doesn’t work out, but it’s hard to predict how long it will take to know. The tenant with the lease can walk away from the deal the next day or drag it out for another three weeks then sign.

The best way to approach the landlord if you want a space that has a lease out is to send a strong offer to the owner and tell ownership that you are ready to move forward asap if there is a snag in the negotiations with the tenant with the lease. I would also send them reminders that you are still interested about once a week. This serves a couple functions:

• Let ownership know an attractive deal is on the table if they are having difficulty with the existing tenant. The landlord is more likely to reconsider taking a deal off the table with another tenant if they know they have something else to go with (rather than no one else interested)
• Keeps you fresh in their mind and let them know you are serious. Sending a commitment along with information about your company is different than having your broker ask them to let you know if something changes.
• If there are a couple people watching the lease hoping it doesn’t work out, having your offer ready to go gives you an advantage on other interested parties. The owner will probably contact you first if there’s an issue with their current deal.

Escalations typically refer to annual increases the landlord charges to account for the rise in operating expenses, inflation, market increases, and profit.

A standard Manhattan escalation is 3% per year, but can sometimes be negotiated especially in a soft market. Certain landlords will ask for higher escalations (4-5%) and in certain instances we’ve seen a landlord charge a 4% increase, but not hold a tenant responsible for their proportionate share of real estate tax increases. So in that case, the tenant is probably better off.

On a longer lease, there is typically a bump, in addition to an escalation, around the 5-7th year.

Certain landlords won’t require a fixed increase, but will instead adjust the lease annually according to the consumer price index (inflation). This is less predictable and not necessarily worse (depending on how the economy is), but is more dangerous. For example, if inflation spikes tremendously (e.g. 8%) in the second year of a ten year lease, you are suffering the consequences for the rest of the lease.

If a landlord requires CPI instead of a fixed increase, we usually suggest having the CPI limited or capped to for example, 5% (but obviously, the lower the better).

Leasing an office in Manhattan can be overwhelming, but by working with an experienced, knowledgeable and reliable agent that prepares you for what to expect, it facilitates the process.

One of my most common challenges with first time nyc office tenants is conveying how rare it is to find a one year lease. Companies looking to rent their first office in Manhattan will often assume that a one-year term is easy to get or even standard.

While there are a couple landlords that specialize in renting small, cheap spaces routinely for one year. most landlords, especially in quality buildings require 3 or 5 year minimums.

You can stumble onto a sublet with approximately one year left, but I wouldn’t hold my breath waiting for one if it doesn’t pop up on your broker’s first run through CoStar. Trying to rent for a one year is like trying to lease a car for 9 months or renting an apartment for 4 months. It’s not impossible, but it is extremely difficult and your options are going to be severely restricted.

Why wouldn’t any landlord take a 1 year lease?

• Usually spaces need some work to get them into move-in condition. At minimum, it’s usually new paint and new carpet (or refinishing hardwood floors). Sometimes it can be demolishing or adding an office. This is not a major cost when amortized over 5 years, but for 1 year, it doesn’t make as much sense.
• Very aggressive landlords will prebuild space, spending a lot of money to display a beautiful, finished product. Often the cost of gutting a space is equivalent to about a years worth of rent. Clearly it doesn’t make sense to do this once a year (and leave vacancy time to rebuild and rent the space)
• Renting a space takes work. A landlord needs to approve the tenant, sometimes meet them personally, introduce them to the building, get them moved in etc. A landlord doesn’t want to have to spend his time doing this for someone that doesn’t want to commit to a long term tenancy in their building
• Legal costs: the landlord’s attorney still charges the same amount to negotiate a 1 year lease as a 10 year lease
• Brokerage commissions. A landlord pays less of a broker fee on a short lease, but since a standard commission schedule is lighter in the later years and also does not account for escalations, it’s less commission on average per year for longer leases. For example, a landlord will typically pay 5% of the first year’s rent for commission and 2.5% of the 6th year and he will be receiving over 15% extra rent in year 6 on escalations that he is not paying commissions on. This makes the commission for year 6 less than half of that for year 1.
• Renting a space takes time. Each time a space comes available, it’s probably going to be vacant for a few months before it’s rented again. It’s not the end of the world to lose 3-4 months between 5 year leases, but to lose 3-4 months between 1 year leases is a huge problem.
• Move in dates. Most New York leases start on the first of the month so the landlord can lose 0-30 days from the time of lease execution until the time they actually start getting rent. 20 days lost on a 7 year lease is insignificant, but on a one year term it matters. Keep in mind that there is also time spent negotiating the terms of the deal and reviewing the lease which can be another few weeks to few months depending on the size of the space.

I met with a small landlord a few months ago that had an interesting approach to short leases. He offers 1-5 year terms on all his spaces. He does not spend a penny fixing up the spaces (no paint or refinishing the concrete or hardwood floors in the building).

If you take a one year lease, you have to pay his legal bill. If you take a two year lease, you have to pay 1/2 of his legal bill. A three year lease or longer, he pays his own legal bill.

I found this interesting especially since it means that a one-year tenant is not going to spend the landlord’s time and money making excessive lease comments on a  one year term (since they’d be running up a bill on themselves). It was an interesting approach to accepting short term tenants.

As the tenant, if you had to spend $1,500 on your lawyer, $2,000 on the landlord’s lawyer, and $5,000 fixing up a small space that rents for $3,000 per month, wouldn’t you be more inclined to amortize those costs (especially if you could eliminate the legal fees).

Obviously, this doesn’t address all the typical objections, but certainly represents a compromise and creative thinking.

As an example:

• A landlord is looking to lease a space for $10,000 per month
• He spends $75,000 renovating it
• He spends $5,000 marketing it (floorplans, brochures, e-marketing, mailers)
• It’s vacant for 4 months
• He finds a tenant that negotiates the terms for 2 weeks and finishes executing the lease another 3 weeks later.
• The following first of the month is 17 days after the lease signing.
• He spends $2,000 in attorney fees

On a 5 year lease:

• He pays $36,000 commission (1 commission to the tenants broker, and half a commission to his broker), an average of $7,200 per year
• The out of pocket expenses ($82,000) average $16,400 per year
• The lost rent (6 months) averages to $12,000 per year
• His net is $120,000-$35,600 ($7,200 + $16,400 + $12,000) = $84,400 per year (plus escalations)

On a 1 year lease:

• He pays $9,000 commission
• $120,000 – ($9,000 commission + $82,000 out of pocket + $60,000 lost rent = $151,000)
• His net is negative $31,000!

To further exaggerate this, after 5 years (and 6 months)

• On a 5 year lease, the landlord will profit over $422,000 and save a lot of time and energy.
• By doing 4 one-year leases, the landlord will lose $124,000 and have to lease the space 4 times, a difference of over half a million dollars.

Of course, one year tenants can renew, alleviating this issue (and possibly saving them on the commissions) and some landlords don’t spend much renovating their spaces (and some spend more).

Either way,  it’s probably becoming clear why all these landlords are being so stubborn and inflexible about renting you their spaces for one year.

The most important part of any offer is the prospective tenant’s financials. If you are a new business and don’t have anything to show, the owner may reject you outright or require a higher security deposit (6-12 months).

1. Personally guarantee the beginning of the  lease. It would be foolish for anyone that wasn’t unnecessarily wealthy to personally guarantee a 10 year lease, but it’s not unreasonable for someone to put their money where their mouth is for just the first year or two. The term “personal guarantee” can give some tenants an allergic reaction, but as one landlord I know put it, “If you don’t even have confidence in your business, how can you expect me to?”. After all they are signing the agreement and putting up the up-front costs with the assumption you will last the entire lease term. It would be a lot more justifiable for them if they knew they were at least getting the first year of rent (especially since the landlord’s upfront costs can often be equivalent to a year of rent if there is a build-out). Once you have paid rent timely for a year or two, the personal guarantee can revert to a good guy guarantee.
2. If your company is funded by, or is an offshoot of a larger company, you can have that company sign a corporate guarantee. This is the same concept as a personal guarantee and can also be dissolved or turned into a corporate good guy guarantee? after a certain period of time.
3. Offer a higher security deposit that burns down as the lease wears on. Start with 6 months, after a year of paying rent, bring it down to 5 months, after another year bring it down to 4 months. This way if you go out business after two months, the landlord is well protected, but if you go out of business 3 years from now, you’re not getting killed on the deposit on top of it. Keep in mind that things like having an impressive website can also help make the landlord feel more comfortable. Also realize that every landlord is different. I’ve had the same tenant approach two different landlords with the same financials and have one landlord offer her a 7 month deposit and another landlord offer her a 3 month deposit (guess which space she rented).  I recently even had one very responsible and knowledgeable landlord rent my tenant a space without even asking for financials since the tenant gave her a 3 month deposit (which is minimal) and signed a standard good guy guarantee. Granted, that was the first time in 5 years, but again, every landlord is different.

First of all, does anyone really know how much space their company will need in a few years? This is normal.

• Although you will usually be accommodated regardless since it makes sense for the landlord too, it’s a good idea to insist there is a clause in your original lease stating you will be able to relocate to larger space as it comes available. There will be a percentage attached to this (usually at least 30-50% larger) since a landlord is not going to want to move you from 2000 sf to 2200 sf, it’s just not worth the trouble. There’s no reason a landlord should have an issue with this.  Don’t confuse this with “a first right of refusal”.  This is problematic for landlords because they may rent a space they did not think a tenant was interested in and then get sued by the tenant because he didn’t offer it to them first or because they didn’t decline it in writing (the landlord could get sued even if the tenant didn’t actually want the space). Also, they can’t give more than one tenant “first right”  so someone else may already have it.

• Make sure you are in a large enough building. Being able to move around is great if you are in a 40- story building with space coming available frequently, but it’s fairly useless if you have a full floor in an 8 story building.

• If you have a small space, going with a huge landlord might also be a bad idea. If you have 1000 sf and your landlord owns 10 skyscrapers, relocating you is not going to be their first priority.

• If you’re growing extremely fast or starting really small, spend a few months in a business center.
• If you’re expanding and your landlord can accommodate you in a larger space, great!
• If you’re expanding and your landlord has no space, you can sublet or assign. You might lose a couple months of rent or eat a monthly cost, but remember your business is expanding (good problem to have) and you are probably significantly more profitable and can afford this cost associated with growing your business.
• If you have a buyout clause and decide to exercise it, again, it’s the cost of doing business and the reason you are exercising it is that you are making more money.
• If your business has failed, you can disband the company and walk away from the lease.

Just like with anything else, it’s important to strike a balance between being too careful and being negligent.  Not reviewing a lease carefully or not using the right attorney can leave you vulnerable over the course of your lease.  Proposing too many changes to a lease can cause the lease process to drag out, run up your legal fees, and possibly jeopardize the landlord renting you the space.

• Base tax year: This is usually (but not always) addressed prior to drafting a lease, but it doesn’t hurt to double check that this is set to the appropriate year or you will be paying for it every year when real estate tax increases are assessed.
• Landlord Work: If you are the tenant, you want this to be as specific as possible. If the landlord has not committed in writing to do certain things, he is not obligated to. For example, things like types of finishes (marble, granite, stainless steel), dimensions of glass openings in offices, types of lights being used, hot water for your sink, a certain type of radiator, type of ductwork, and walls with specific insulation. If you don’t have it outlined in the lease and you sign it, you don’t have any recourse. Don’t go too crazy with it on insignificant things, but if something is important to you, I would make sure it’s explicit.
• Extra monthly charges: This will usually be spelled out before a lease is drawn, but some landlords will try to sneak a few in. Look out for things like water, sprinkler, carting, guard charge etc. Again, these will usually be presented beforehand, in which case you have already agreed on. But if they haven’t been, there’s no reason you should pay for them. I’ve even seen leases where they hold the tenant responsible for their proportionate share of toilet paper, paper towels, and cleaning supplies in the bathrooms!
• Insurance Requirements: Make sure they are appropriate to the size of your space and quality of the building. Remember, insurance is not that expensive and does benefit you so I wouldn’t make a huge issue out of this.
• Notice Period on Good Guy Guarantee: This will have the most impact on you personally if your company goes under so I would try to reduce this as much as possible. Keep in mind that the higher the security deposit is, the more leverage you should have on the notice period. For example, if you have a 9 month deposit, they might let you off the hook with 45 days notice. If you have a 2 month deposit, it might be 150 days. Typically, 90 days or less is pretty reasonable to have.
• Air Conditioning: If it’s a class A building, you are usually not going to be responsible, but if it’s a “B” or  ”C” building, you usually have your own air conditioning unit(s). If it’s a central a/c unit or window unit, you want to make sure it’s delivered in good working order and try to get a grace period on the replacement if it fails. For example, on a 10 year lease, try to make the landlord responsible for replacing the unit if it breaks down within the first 2 years. Or if you have 3 window units, have the landlord be responsible for replacing the first one (and you’re responsible for the rest). You’re also going to want the landlord to be responsible for the first servicing of the ac unit. Keep in mind that it’s almost always the tenant’s responsibility (and in their best interest) to keep a maintenance contract for central air if it’s in the space.
• Overtime HVAC: Especially in Class A Buildings, your hvac hours are probably going to be limited to a variation of normal business hours. Anything outside of that will be considered overtime and billed at a very high hourly rate (usually about $100-$200 per hour). Most people don’t ever use the overtime hvac, but make sure it’s not insanely high (I’ve seen $300+ per hour for about 2500 sf), and if it is, try to change it.
• Window Cleaning: It’s usually the landlord’s responsibility to clean the exterior of the windows in a Class A Building. In a “B” and especially a “C” building, it’s often the tenant’s responsibility to clean the exterior of the windows. It’s actually not as expensive as you think it would be (probably about $20-$50 a window), but I would try to get the landlord to clean them once for you at the beginning of the term and they usually stay pretty clean for a few years.
• Right to Expand Within The Building: Try to get ownership to agree in writing that you can expand into a larger space provided it is at least X% larger than your existing space. Obviously, the lower the percentage, the better, but I wouldn’t expect to get anything lower than 40% (at the lowest). It’s typically in the landlord’s best interest to accommodate a growing tenant as well so I wouldn’t assume the landlord has an issue with this if they don’t concede. Usually it’s to limit their liability (like most things in a lease).
• Late Fees: Make sure you have a reasonable grace period on rent payments and try to get the first late penalty waived, or even be permitted one late payment every few years if possible. Sometimes there are clauses stating if there are, for example, 3 late payments in a year, the landlord has the option to terminate your lease. Make sure the landlord can’t kick you out if you are two days late on your rent one time!
• Mandated Improvements: This means if the owner needs to upgrade anything required by the government, you have to pay your proportionate share. If at all possible, try to get this eliminated or restricted to a certain cap. This often won’t be in the lease to begin with.
• Use of Premises: Try to get this as vague as possible in case the nature of your business changes or you want to sublet. For example, you’re better off having “Office Use” than “Marketing Company” or “Travel Agency”.
• Holdover Clause: This can typically range from 1.5X the escalated rent to 3X the escalated rent. It is in your best interest to get this as low as possible (but don’t expect to get it lower than 1.5x in the best case scenario). This is particularly important if you end up subleasing the space for less than you are paying.
• Sublease Notice Period: Most landlords will expedite the approval process for subleases, but it will help to shorten the notice period so you can “promise” a sooner occupancy date for a subtenant that needs the space urgently (and get yourself an extra month of rent).
• Sublease Profit-Sharing and Right to Recapture: Landlords usually share about 50% of the profits from any subleasing, but make sure that it’s not anything more and keep in mind that they have the right to recapture, you may not ever get to profit. Also, make sure that the landlord gets 50% of the profits after all the expenses like brokerage commissions, legal fees, reimbursing the landlord’s legal fees, etc. They will also expect a percentage of any profits from furniture and fixtures sold (even though you bought them), but again, at least worth a shot to eliminate that.
• Sublease Approval %: Try to avoid requiring approval for subleasing less than 30% of your space (for example renting out an office within a law firm). Landlords usually won’t care anyway when it comes down to it, but better off not even having to notify them.
• Sublease Broker: Some leases may have clause requiring you to use them as the broker if you sublet. It definitely wouldn’t hurt you to have the choice of what broker to use. Sometimes you won’t get the choice, but it doesn’t hurt to attempt.

Securing quality office space in New York City is often very competitive. Having as much preparation as possible can facilitate a fast negotiation and smoother, cheaper, transition. There’s a good chance you will be one of several prospects for a particular space so how efficiently you can complete the transaction can make the difference between getting your space or not.

Below is a checklist of contacts, resources, and decisions that are helpful to have squared away when you begin your search:

For the lease process:

• Money for first month’s rent, security deposit, and other move-in costs. Security deposits are typically in the 2-4 month range for a company with strong financials. If it’s a new company or one without enough income to put a landlord completely at ease, it can be more. You should have at least 6-8 months worth of rent ready to dedicate to security deposit, rent, and other expenses so you aren’t scrambling at the last second. If you don’t have that kind of funds to dedicate, you should hold off on the search and maybe find a business center or short term solution until you can pull together the requisite cash.
• A quality New York City real estate attorney. One of the most common blunders I’ve seen is a potential tenant relying on an attorney that does not specialize in lease reviews and/or specifically, New York city lease reviews handle the negotiation of their lease documents. This will almost always cost the tenant extra money, extra time, stress, and most importantly, can leave them less protected throughout the course of the lease than they otherwise would have been.

If you’re drafting a baseball team, it makes the most sense to pick players that have played a lot of baseball rather than basketball players, even if it’s the best basketball players of all time (remember Michael Jordan?)

Decide who is signing the good guy guarantee. This is a standard part of most leases and unless you are a huge corporation or want to put up 3-4 months of extra security deposit, someone will need to sign, usually the president of the company. If you have several partners, this is a discussion that would be prudent to have ahead of time. As a compromise, multiple people can be liable- it doesn’t reduce anyone’s individual liability, but it does give the other guarantors more of a reason to comply with the stipulations of the guarantee.

Determine internet requirements: almost any building in Manhattan will have “high spend internet”- at minimum DSL, cable or T1 available which would satisfy most businesses. However, if you are in a business that has higher IT needs like film editing, media, etc; you might need something more robust. Determining your usage needs in terms of mbps is a smart thing to do. Ideally, you don’t have needs that would require anything more than a basic connection so your options aren’t limited. If you do have heavy IT needs, you’re better off weeding out the buildings that don’t have it available before even looking at them.

If you learn that your IT needs are more than a basic connection, I would contact the providers that service the building to confirm that they do, in fact, service the building and the speeds that are available. The landlord’s broker(s) often don’t know all of the providers that service the buildings and sometimes even (unintentionally most of the time) mistakenly tell you providers are available when they aren’t. If it’s vital to your business, you should confirm firsthand that it’s in the building before moving forward with the lease.

For move-in:

• Insurance Agent: almost all leases require the tenant to maintain specific insurance coverage and name the landlord as additionally insured on the policy. You will need to secure this coverage prior to moving in. It’s usually not a long process, but it’s smart to take care of it as soon as you can. If you leave it to right before you want to move in, it could potentially hold up your move.
• Schedule for internet installation: this can have a lead time of a few weeks so I always recommend that a tenant call to arrange an appointment to get their service activated as soon as they can. If the lease doesn’t end up being signed or the possession date is pushed back, you can cancel with no penalty.
• IT wiring company: this is separate from the providers and is a contractor that can install your phone and data lines. Obviously this is an essential step in the move in process
• IT support company: if you don’t have your own in-house IT department for computer, phone, and web issues, you may want to consider hiring a company to handle these needs for you.
• Air conditioning contractor: if you have a central air conditioning unit, it’s most likely that the lease stipulates that you are responsible for obtaining a maintenance contract for the life of the lease. You will want an air conditioning contractor to inspect the unit prior to lease signing to make sure it’s in good working order and you aren’t penalized for receiving a broken unit. In the summer, air conditioning contractors are very busy so it’s hard to get an appointment. It’s much easier to get an air conditioning contractor to inspect your unit and send you a maintenance contract before their busy season. So if you’re signing your lease in February, don’t wait until May to address the air conditioning.
• Moving company: if you’re moving in at the beginning or end of a month, it’s going to be hard to find an available mover unless you book weeks in advance.
• Furniture vendor: it can often take weeks for furniture to be delivered so it’s smart to give yourself as much lead time as possible.
• Office equipment: printers, copiers, and other business machines are part of almost every office
• Window treatments: unless you are in a class-a building or taking over a space that was previously occupied and still in tact, you will be responsible for any window treatments you want. This can also involve a little lead time so it’s best to get it out of the way sooner than later especially if you are lucky enough to rent one of those super bright spaces that everyone seems to want.