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The Top Ten Mistakes Companies Make When Leasing Office Space

July 14, 2008

Following payroll expenses, facilities and related expenses are generally the second highest expenditure for a company. While people are naturally the most important asset to a company, real estate decisions should not be far behind. Too often though, companies fail to see the significance of real estate in the same light.

The impact real estate has goes far beyond the bottom line; it plays an important part in everything from employee retention to the level of productivity and workplace morale. It’s for these reasons that companies should always be cognizant when making real estate decisions.

The top ten mistakes that companies make when leasing space are:

  1. Not Using a Commercial Real Estate Broker. It is imperative that companies not only understand the market, but have an advocate working on their behalf to both maximize savings and help the company meet its goals. A good broker can provide insight into the market, trends, landlords, demographics, and be a skilled negotiator. It is also important that you use a broker who is focused on commercial real estate; residential brokers often try to dabble in commercial and get in over their heads.
  2. Waiting Too Long to Start The Process. The longer a tenant waits to start the process, the fewer the number of options that will be available to them. Waiting too long can mean that a tenant will pay more, receive less favorable lease terms, or that they are forced to leave and take less than desirable space elsewhere.
  3. Leasing The Wrong Amount of Space. Figuring out how much space to lease is not an exact science. Forecasting involves assumptions, which can often lead to costly mistakes if incorrect. Uncertain events notwithstanding, companies should take the time and effort to work with a space planner or architect to plan and program to determine the right amount of space to lease. With that information in hand, companies should then go one step further and think about the impact certain business scenarios would have on that number, the likelihood of those events happening, and adjusting the number so as to minimize the likelihood of taking down too much or too little space.
  4. Picking the Wrong Location. What may seem like the right location might in fact not be. Companies should consider things such as access, public transportation, demographics, zoning laws, and other factors to help identify the right location for their business.
  5. Not Thinking About The Future. Aligning a real estate plan with a corporate business plan is difficult to do when milestone events and setbacks do not always go according to plan. To help deal with the “unknown”, negotiating leases which provide both expansion and contraction rights to the extent possible is therefore instrumental. Companies need to go beyond the simple lease and think about sublease rights, expansion rights, rights to cancel, and options to extend.
  6. Not Measuring The Space. Companies should strongly consider verifying the landlord’s square footage numbers. In larger transactions, even a small difference can translate into a large savings. If it is not possible to measure the space, tenants should at least try to negotiate a tolerance in the measurement. Generally though, and per BOMA standards, a variance of up to 2% is acceptable.
  7. Signing Too Long or Too Short of a Lease. Companies often think that by signing a short lease they are buying themselves flexibility. That may be true in many cases, but that flexibility often comes at a price. On the flip side, tenant’s may feel a long term lease provides maximum stability, but there are far too many cases – particularly in Silicon Valley where swings in rent can be large - where long term leases signed at the height of the market have gone so far as to force companies into bankruptcy or caused severe harm to the company. It’s therefore imperative that companies take a long-term approach to real estate, while keeping short term trends and business activities in focus.
  8. Not Verifying Building Systems and Infrastructure. In today’s environment, data, power, networking, and HVAC capacity and availability are crucial. Tenants should ensure that buildings they intend on occupying are capable of providing the network connectivity and other building systems necessary for a tenant’s operation before signing any lease.
  9. Not Having Your Insurance Carrier Review the Lease Language. Tenants should always have their insurance carrier review the language within a lease that pertains to insurance and subrogation to verify that the insurance is not only attainable, but attainable at a reasonable cost. It is strongly recommended that the actual lease or lease language be sent to your insurance carrier for review before any lease is signed.
  10. Not Retaining Legal Counsel. By using an attorney well versed in the documenting of a real estate transaction, companies can help avoid ambiguity and errors which could lead to expensive litigation or legal wrangling down the road.

These are by no means the only 10 mistakes a tenant can make when leasing space. Instead, it is meant to outline some of the most common mistakes tenants can make, and also what can be done to help avoid them. A good commercial real estate broker can help guide you through the leasing process. If you have additional tips, feel free to share them by making a comment.

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Comments
Full Service Broker July 16, 2008


Here’s another one: No need to use a Tenant Rep Only firm…a thing of the past, in my opinion. It’s funny to see firms like Staubach and JLL merge together…what’s going to happen to Staubach’s “Tenant Rep Only” pitch??? A Director of Real Estate of a large, publicly traded firm I represent asked me the other day if other firms are still buying that whole pitch. My answer was “Yes, unfortunately, but it’s usually an inexperienced decision-maker who doesn’t get it. But you still see some CFOs insisting on using a Tenant Rep Only firm.” His reply was, “Why would I only want to know one side of the story, when I have the opportunity to know both sides???…as long as there’s trust.”…my response was “Exactly!”. Some of the most dominant firms in the Bay Area (and the world) represent both Tenants and Landlords…it obviously works. In addition, a firm that represents Tenants and Landlords has access to more comps, while “Tenant Rep Only” firms have to fight to obtain that information. But in the end, hiring a broker to represent you comes down to trust; this will avoid all potential conflict…if all information is disclosed and the cards are face up, then there shouldn’t be a problem. And in the end, as it was suggested in item #10, a reputable real estate attorney should review the contract before there is any final commitment.

Just my $0.02

Greg D. July 16, 2008


Full Service Broker – if you are implying that using a tenant rep only broker is a mistake, then you are delusional.

Full Service Broker July 16, 2008


That’s actually NOT what I’m implying. I am actually a Tenant Rep broker, but my firm, like most, provides services for both Landlords and Tenants. All I’m saying is that certain firms insist on using a Tenant Rep only brokerage firm, thinking that they will avoid conflict if they do so…that is something that simply isn’t true and, in fact, is sometimes not as beneficial as having access to the resources a Full Service brokerage firm can provide.

Greg D. July 17, 2008


There are far too many agents within traditional firms who claim they are “tenant rep” who also do agency leasing for landlords.

This might or might not be you (though I suppose it could be since you identify yourself as a “Full Service Broker”), but if a broker can’t be honest with himself or herself, what chance does a tenant stand?

There are simply too many brokers in this business who claim to be a tenant advocate, but who would not think twice about taking on a nice agency leasing assignment.

Full Service Broker July 17, 2008


We are getting off track, Greg D…but to clarify, I am strictly a Tenant Rep broker: no listings for any Landlords whatsoever. But my firm offers Full Service Brokerage, so I offer my clients all the services that they may need. And if there is the potential of any conflict on the horizon, then I happily remove myself or any related parties from the assignment in order to better serve the client…I’ve done it before, and my clients have always appreciated that. Regardless, even the “Tenant Rep Only pitch” can be considered a bunch of BS…at some point over the lifetime of a company, space will have to be sublet…then what happens??? Then as a Tenant Rep broker, one would have to sublease space and essentially you are listing a space that is competing with other Landlords in the market…those other “Landlords” can easily be a competing firm with competing sublease space that the same broker happens to represent. This, in turn, also brings up the question as to whether or not the Tenant Rep broker is qualified to list the sublease in the first place, seeing how he/she does not even work on listings on a regular basis…we obviously can keep going with this.

Anyway, this all brings me back full circle to what I initially said…it’s all about trust, full disclosure, and doing the right thing. If a broker puts the client first instead of worrying about commissions, the right thing will be done and in the end, fees will ethically be earned.

Greg D. July 17, 2008


You are right that this is a trust issue. You are not right in that that brokers always put the client first.

With a full service brokerage house the chances of selecting a broker who has ties to a landlord either through himself or through his firm is much higher than if you go with a tenant rep.

Tenants simply have more peace of mind when going with a tenant rep only firm. After all, there are enough Fortune 500 companies utilizing such firms that your statement that “Tenant Rep Only Pitch” can be considered a bunch of BS …. is well, BS in itself (to use your own words).

Bear in mind also that most successful companies choose their representation as a result of company culture and personality. In many large brokerage houses (full service ones that you refer to), brokers take an every man or every team for himself approach, whereas we’ve found that in many of the notable top tier tenant rep firms, it’s more of a team approach.

As a CRE professional, it is not a good feeling knowing that your broker might be operating in an environment where it is difficult for him to trust even his own co-workers. As they say, birds of a feather flock together.

What brokers such as yourself often fail to realize is that the client-tenant relationship goes far beyond simply knowing “both sides of the story”. A little extra market knowledge never hurts, but there is a hell of a lot more to it than that.

Full Service Broker July 17, 2008


Wow…I’m going to nip this one in the bud and leave it with these final comments. First of all, I did not say that brokers DO put the client first. Rather, I’m suggesting that brokers SHOULD put the client first. And second of all, I’m not saying that using a tenant rep only firm is a bad thing…I’m simply suggesting that the advantages of using a firm that knows “both sides of the story” outweigh the advantages of using a Tenant Rep Only firm. And third of all, your comment about Fortune 500 companies and saying that my comment is BS is, A) not professional on your part, and b) why don’t you tell me what Tenant Rep Only firms are left out there with the recent acquisitions of Predium by Newmark and Staubach by JLL? And why don’t you also tell me how many Fortune 500 companies are served by these Tenant Rep Only firms that are left? The major firms like C&W, CBRE, JLL (now JLL/Staubach–interesting pitch for Staubach brokers now, eh?), etc…these guys represent the majority of the Fortune 500 and accounts this large MUST be served by teams; not individuals. And last but not least, you completely ignored my arguments on sublease scenarios and the potential conflict that arises when a Tenant Rep Only broker has to put space on the market…I’ll take that as another +++ for the Full Service Brokerage side.

Again, I am strictly a Tenant Rep broker who takes advantages of ALL the resources my Full Service firm provides. MY FORTUNE 500 clients are amazed by the resources, market knowledge, and network of brokers I have access to globally…and they trust me because EVERYTHING is disclosed and my actions speak for themselves.

jessica freeman July 17, 2008


Hello

Very nice blog. I really enjoyed reading it. Anyway, I look forward to all the updates. Thanks again.

Jessica

Former Ten. Rep. Broker July 20, 2008


Good point. There isn’t a firm in Silicon Valley that is 100% tenant rep as most if not all take sublease disposition assignments. Read any sublease document and there is a sub-lessor or sub-landlord mentioned. Who brokered this deal? The tenant rep. broker. The larger the tenant rep firm, the more they are in the landlord business as well.

Also, for 13 years I represented some of the fastest growing companies in the Valley while working at a brokerage shop that made about 75% of its revenue representing landlords. This put my client in a great position to know when new buildings were opening up in a tight market, and what landlords would make creative deals in a slow market. Without rubbing elbows with the guys that controlled all the space, it would be very difficult to truly know the market and to follow the deal flow.

AA October 1, 2008


Studley is a tenant only firm. They just did 562K RSF for Brocade.

AA October 1, 2008


….and if you can’t rub elbows with guys that work for other shops to get a bead on the market shadow spade, then I understand why you are a former broker. Also, if you are suggesting that the landlord brokers will only share their secrets with their collegues, then their landlord clients would be better off with in-house brokerage. I side with Gred D on this debate.

Jonathan Pollack July 7, 2009


I have measured millions of square feet for commercial real estate tenants. I would say about 80% of them have less space than what they are paying for.

jef margolis August 31, 2009


Enjoyed your top 10 list.

As a leasing attorney who has repped both LL’s and T’s I would say a savvy broker and experienced lawyer will cover 98% (not scientific!) of a T’s concerns.

You put lawyer last — no ego problem with that– but the team approach works well every time.

JAM

Wes Brown September 9, 2009


Great information. It would be great to see more information like this. I would add “Not letting your broker do all your negotiating.” If the client can keep still a good broker will negotiate a far better deal because they are not emotionally involved, or should not be.

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