1) Negotiating with your landlord. The build out of a commercial space is a key point that is negotiated between the tenant’s real estate broker and the landlord. Manhattan landlords approach improvements to tenant’s space in various manners. Here are some of the ways your landlord might approach your build out:

• A new building installation (NBI) based on the tenant’s architectural plans. Landlords use building standard materials and finishes when they provide new building installations. If the tenant requires that above standard materials or finishes be used, the tenant is responsible for paying for the difference in cost between building standard and upgraded materials and/or finishes.
• A work letter reimbursing the tenant for the cost of construction. The tenant is allowed to hire their own licensed and insured architect and contractor to build out their own space. The landlord then reimburses the tenant. A cap based on a dollar amount spent per square foot is put on the reimbursement.
• Free rent in lieu of construction. Generally, the longer the term of the lease the greater the amount of free rent.
• A combination of free rent and a work letter.
• Offer modest improvements to the existing space. These modifications generally entail, paint, carpet and some cosmetic changes.
• Rent the existing space in “as is” condition.

Obviously, the more you want to do to the space, the more money you’re looking at – but often, this won’t be coming directly out of your pocket.

2) Union Buildings vs. Non-Union Buildings. Most of the big, nice and well-respected buildings in New York are union buildings – when you build out in a union building, you work with union contractors and union electricians, etc. Less fancy buildings, such as a small office building in Soho, are generally non-union buildings. Here, you’re not required to utilize union workers for your build out.
What’s the difference?

• Union building build outs cost twice as much as non-union building build outs.
• For example, a union carpenter costs $50/hr to a non-union carpenter’s $25/hr

3) Plain Vanilla Spaces vs. Sexy Spaces. There’s a price difference between what the industry calls a “plain vanilla” (read: builder’s beige) space and a sexy, colorful space.

• Plain vanilla spaces always cost less. For these spaces, you’re looking at $75-$100 per rentable square foot in a union building. In a non-union building, a plan vanilla space build out can go for as low as $40-$60 per rentable square foot.
• Sexy, colorful and more visually intriguing (read: more work to be done) spaces will cost you double that. In a union building, you’re looking at anywhere from $150-$200 per rentable square foot; in a non-union building, a bit less.

4) Office Furniture. Once your space is built, it’s time to think furniture. We’ve created the handy dandy chart for you to utilize below to calculate how much your office furniture will cost. Calculations are based on a density of 200 sq/ft per person and a mix of 20% private office and 80% open office cubicles.

Furniture Quality Level / Price Per Square Foot / Total Cost

A level furnishings / $25.00 x ____SF
B level furnishings / $20.00 x ____SF
C level furnishings / $10.00 x ____SF

This is just to get your started.  For more in-depth information, fill out the form below!

In New York City, which is often referred to as a “whole different animal” when it comes to real estate, tenant improvements refer to a fixed amount of money specifically designated by the landlord to improve the tenant’s space. There is no situation in which this money could be spent on other things (though this is the case in places outside New York City). Here in New York, when someone offers you a tenant improvement allowance, that money is spent on the actual space in which you will move.

Here are some things to know:

- When a tenant moves out, the landlord demolishes the space and rebuilds it based on a generic model. They build out the space to what is called the “building standard.”

- Landlords will then bring potential tenants into the “building standardized” space – much like looking at a model apartment.

- Smaller tenants will often take these “pre-built units” as they are; larger tenants may request that the landlords transform the space and “build to suit.”

- If you’re looking for 7500 square feet of space or less, the landlord will generally take care of the entire buildout for you. Though you won’t pay out of pocket for the contractor, the construction, etc., you’ll be paying for it in your rent – this is the tenant improvement allowance.

- Landlords are in the construction business – they have contacts with all the people needed to make a buildout happen. They’ll take care of the construction component. Generally, you just take care of the rent and the voice data cabling.

- Should you choose to take care of the construction component yourself, you can ask for a cash contribution from the landlord.

For those of you outside of New York, here’s what you need to know:

When comparing potential rental properties, it’s important not only to consider the amount of rent on the table, but also to consider what is called the tenant improvement allowance. When a tenant leases office space, renovations and reconfigurations are usually necessary. These changes can be as small as a new paint color on the walls, or a gut renovation to transform the space. As part of your lease transaction, the landlord will generally contribute a fixed amount of money toward these changes. This is the tenant improvement allowance. Unfortunately for tenants, landlords don’t use any sort of standardized formula when determining the amount of the tenant improvement allowance.

When negotiating your tenant improvement allowance, make sure you understand what the landlord is using as a basis for construction. For instance, what portions of the common areas are to be built and expected to be paid for from your allowance? You do not want your entire tenant improvement allowance to go to common areas; in this case you would end up paying for the build out of the new office space yourself. Confused?

- Building A offers you $40 rent and $140 for Tenant Improvement Allowance

- Building B offers you $45 rent and $60 for Tenant Improvement

At first glance, the uninformed tenant would be drawn to Building A – imagine what you could do with such a high Tenant Improvement Allowance! However, upon further examination, you may learn that the higher advertised Tenant Improvement Allowance was necessary so that the landlord could update the basic systems – sprinkler head distribution, ceiling grids, etc.

Building B, on the other hand, while offering a lower Tenant Improvement Allowance, is a better deal. This is because the lower Tenant Improvement Allowance at Building B provides the dollars directly to the tenant for the build out of their new space.

Understand the “starting point” of your landlord’s building work. Once you know the base, you can better understand which landlord is offering the best deal. A Tenant Improvement Allowance is practically irrelevant unless it is presented in relation to the current conditions of the building in question. Figuring out this relationship allows you to smoke out the real dollar amount you will have available for your build out.

Hey, we all make mistakes – but when it comes to leasing office space for your business, mistakes equal dollars – sometimes big dollars.  Here are the ten most common mistakes tenants make when renting office space, as well as an insider’s take on how to avoid making them.

1. Lack of Planning: Believe it or not, many tenants aren’t clear on what exactly they need.  If you’re out looking for ten thousand feet but you actually need twelve thousand, you’ve got problems.

§ INSIDER’S TIP: have an architect do a space program and figure out what size you need

§ A lot of architects will do this for free as a favor to your tenant rep broker.  Between a good architect and a good broker you can get clear on things you might not be thinking about, like floor load capacity – do you have a safe or a lot of equipment – then you need re-enforced floors.

§ Do you need extra electric to your space? Have special telecom needs?  Knowing these details up front will save you time, money and aggravation down the road.

2. Lack of tenant representation. We could write an entire article on the benefits of using a tenant representative (oh wait, we already did!), but suffice it to say there’s really nothing better than hiring one to be on your side. A broker understands the ins and outs of the market; they can negotiate for you, and best of all, can narrow down the buildings that would be best for your particular business. Their know-how and advice are indispensible, and they can prevent you from leasing a space that you’ll just end up leaving a few months down the road. Such is also the case with an attorney. Many tenants hire lawyers that don’t specialize in commercial real estate – this is a mistake. Like your tenant representative, you need an attorney that understands the monster that is commercial real estate.

3. Lack of document inspection. Leasing an office space means a whole lot of paperwork. One of the most common mistakes tenants make is that they’re not careful enough with what they sign.

§ Landlords think long and hard about how to make as much money as legally possible on their buildings.  The long lease they give you is not designed to be fair.  It is explicitly constructed to make them money.

§ Further, the ownership documents need to be vetted too. Make sure your space is legally zoned for commercial purposes and for your use in particular, and that it conforms to various safety codes and is built in accordance with the prevailing rules and regulations.

§ INSIDER’S TIP: have the HVAC (air and heat) unit in your space inspected before you sign the lease.  Landlords will routinely say in the lease that the unit is in good working order.  But they often presume this to be true but don’t actually check.  If you take possession and the HVAC unit needs to be replaced, it will cost you a big chunk of change.

4. Rent and security deposit: Before agreeing to the monthly rental, many people do not benchmark similar properties, and end up paying rent through their nose. It is important to compare similar office properties and find out the going market rent in that area before entering into negotiations with the owner. This is Real Estate 101 for tenant rep brokers.  Hire them – they know what they’re doing. The security deposit must also be based on demand, supply and the regular market norms. However, if the owner of the office space seems to be in a tearing hurry to rent out his place, you can always negotiate with him and save yourself some money. Again, this is where a tenant representative comes in handy; he/she will do all of this dirty work for you!

§ INSIDER’S TIP:  Landlords typically want the security deposit as a letter of credit (“LC”) from a bank as opposed to cash or a check.    The reason for this, at least in NYC, is that if a tenant goes bankrupt, the court takes control of cash and it goes to all sorts of creditors before the landlord gets paid. An LC, on the other hand, remains with the landlord through bankruptcy proceedings.

§ Note: it takes a long time to get an LC.  Don’t think it will happen over night.  2-3 weeks is common.

5. Not Checking Lease Terms: A tenant must read and understand the lease terms carefully.

§ Are you comfortable with the notice period?  Let’s say the landlord has the right to relocate you to another floor or space in the building (something that is common for smaller deals) – how much notice do they need to give you?

§ What if the lease says 30 days…can you really pack up and execute a move of both your physical stuff and your technology in 30 days?  Probably not.

§ Do you have a sublet and assignment provision?  Is it fair?

6. Underestimation of Negotiating Leverage. Tenants have a tendency to think that the landlord is all-powerful, but that’s not the case. Ultimately, a landlord is in a service business, and his business is to keep his building full. If this means he has to negotiate with his tenants to fill his spaces, he will. This is especially true for small tenants – even if you’re a five person firm in a million square foot building – you have more value than you think. 90% of the tenants in New York are small tenants. There are only so many big corporations out there

7. Working With a Biased Broker. Tenants sometimes feel that if they’re hiring a big real estate company, they’ll be better represented.

§ The big firms that represent both tenants and landlords will argue that they know all the angles.

§ While this is true, the reality is that their loyalties always lie with the landlords. When it comes down to it, a big firm will side with the landlord over the tenant.

8. Too Little Time. Tenants drastically underestimate how long it takes to either renew a lease or to move. Depending on how much space you have and how complex your technology is, it could easily take 6-12 months to negotiate your deal – double or triple that if you’re really big.

1. Electricity: Make sure you read the fine print when it comes to electricity in your new office space, because all contracts are written to try and confuse tenants (this works in the landlord’s favor). If you’re not careful, the number that you’re quoted could go up as much as 100% in a 5 year period. For example, on the day you move in, you could be paying $3.50/square foot for a 5,000 square foot space. This adds up to $20,000 a year for electricity. However, in most cases, landlords have clauses written into their leases that allow them to “survey” your space and then up your rate.

• A common practice is for the landlord to send in an electrical surveyor who will look at all your office equipment and make calculations presuming that everything is running full tilt 24/7.  This trick is called assessing electrical usage based on “connected load” as opposed to “demand load” or what you actually use.
• So even though you’re starting out at just $3.50/square foot, you could easily be forced to pay significantly more as early as the second month of your lease.

2. Freight Elevator Time: When you move into your new building, you can’t just lug those desks up the normal passenger elevator. You’re required to use the freight elevator, and unfortunately, this happens after business hours. This means that any moving has to be done after 5PM or on weekends. If you’re not careful, your landlord may charge you for the usage of the freight elevator, as well as for a union guard to be present.

• You could be looking at $500/hour to move in, and considering that moving an entire office space is going to take many hours, usage of the elevator quickly adds up.
• Tenants often don’t think they can negotiate the price or usage of the freight elevator. You heard it here first: you can negotiate just about anything. Make sure you talk to your landlord about using the freight elevator and perhaps, not being charged for doing so.

3. Light bulbs/Miscellaneous Maintenance: If you don’t read your lease carefully, your landlord might just include a cause that dictates that only their workers can change the light bulbs in your office space. That means they could potentially charge you $100 every time a light burns out. It sounds ridiculous, but if you don’t have it written into your lease that you, as the tenant, have the ability to change your own light bulbs, you’re looking at racking up them dollar signs pretty quickly.

4. Real Estate Taxes: We’ve touched on this before, but it’s of utmost importance to figure out how the real estate taxes in your building are being billed. You need to understand what will happen to you and your rent if the taxes of your building go out, and how those sorts of figures are calculated.

• In short, what is fair is that you pay a proportionate share of the real estate taxes above a base year.  What does this mean?  Let’s say the total real estate tax on a building this year is $1,000 and you have one of ten floors (10%).  Your base year should be equivalent to $1,000.
• In year 1, you don’t pay anything (remember you only pay your share above the base).  The next year the total real estate taxes go up $100 to $1,100.  You are responsible for 10% of the $100 increase or ten bucks.  Of course it’s impossible to know for sure what taxes will be going forward.  A reasonable estimate of what it will actually cost you (in NYC) is 35 cents per year starting in year two.

5. Preexisting Condition Clause: Most leases have a clause that states that when you move out of your office space, you must deliver it back to the landlord in its preexisting condition. That means all those walls you paid to put up must come down. All that specific task lighting you had installed must be uninstalled. That vibrant paint must be returned to builder’s beige. These sorts of expenses are negotiable, but don’t count them out – the more work you do, the more you could be paying to undo in the coming years.

In short, make sure you or your tenant representative broker read every last word of that lease, because if you’re not careful, you’ll end up paying out the ear for things you didn’t anticipate paying a dime for.

v Your negotiating power depends on whether your local rental market is hot or cold. If plenty of commercial space is available, you can probably win many landlord concessions. If your area’s rental market is tight or you are after a unique space, you’ll have considerably less leverage.

v Tenants are looking at potentially negotiating a savings of up to 20% off of the asking price, and in some cases, even more. Whether you’re considering a new lease, or renewing your current one, you definitely have wiggle room. If you’ve got a tenant representative broker on your side, you’ll do even better. Negotiating is part of the game, especially when you’re playing multiple buildings against one another.

v The more “must haves” you require, the less negotiating room you have. Know what you’d like versus what you must have – views are nice, but does it have to be of Central Park from every window? The smaller your list of “must-haves” is, the more negotiating power you’ll have.

v  Know what concessions landlords are giving in other spaces or buildings similar to the one you’re looking at.  For example, if a landlord is offering a full build out worth $50/s.f. and you can live with the existing condition of the build out, ask for that $50/s.f. in additional free rent.  You might just get it.

v It costs a lot of money for a landlord to lose an existing tenant.  What’s a lot?  12-18 months of lost rental revenue.  Sometimes more.  When tenants fully understand their value to a landlord, they get more concessions.  Often a lot more.

The lessons to be learned here:

• In this market, if you’re renewing a lease or looking for a new one, the odds are in your favor more than you think. Hire a tenant representative and a good commercial real estate attorney, and start saving money.
• The concept of negotiating price per square foot is entirely dependent on the market. Right now, the odds are in the favor of the tenant thanks to the recession, but it wasn’t like this before and it’s likely that it won’t stay like this forever. Take advantage of your negotiation opportunities while you can!

Landlords like long leases. This is because they have mortgages that they’re continually refinancing. When they go to refinance their buildings, one of the key things that a lender looks for is stability in the tenant roster. The longer the leases in the building the better the terms a Landlord can generally garner. Based on this Landlords generally demand a 3 year minimum lease and often times are requesting a 5 to 7 year minimum.  It’s rare to find a 1-or 2 year lease. Most leases range from 5 to 10 years.

The length of the lease you end up with can have a substantive impact on your business. We mention this because an office lease is generally the second largest fixed expense a business has after payroll. If you are a mature company and you don’t intend to grow employee wise significantly, sign a long term lease.  If you anticipate a good deal of growth, try to negotiate expansion options or an out clause if you grow.

-       As a tenant, you have to understand where you’re going and do some planning for the future. If you’re signing a 5 or a 10 year lease, you want to anticipate growth and to the greatest extent possible build in space options to protect you into the future.

-       These are ultimately impossible questions to answer, but statistically speaking, 70% of all tenants that sign 10 year lease in any market end their lease below what the current market will bear.

There’s no one right answer, but you need to think about where your company is headed.

• Plug and play – executive suites offer the ultimate flexibility
• Receptionist available
• Internet and phone set up for you
• Desks, bookshelves and other furniture already there
• Conference rooms available to you
• Interaction with other small business people
• IT people on call
• All expenses built into the rent
• Built in networking
• No commitment needed, no long lease to sign
• One month leases available
• Easy to move if business is bought or grows quickly

CONS

• Nothing actually belongs to you
• No choice of furniture, phone company, internet, etc.
• Receptionist also works for other clients in the space
• Expensive rent – the landlord is renting space, chopping it up, and then charging a higher price for it
• Long term leases generally not available
• You don’t work with your own people to fix things – the operator of the facility has their people and you have to do things on their timeline
• Lots of people around means shared conference rooms that are fist come first serve.

What is a green lease?

A green lease is a lease that is modified to:

-       remove disincentives to reduce energy, water and raw material consumption

-       increase recycling and use of sustainable materials in tenant build-out

-       creates incentives for the implementation of sustainable practices by both landlord and tenant

-       communicates shared environmental standards and goals

-       allocates responsibility to ensure that identified goals will be met by both parties

Because green leases are a relatively new concept, there’s no “one size fits all” green lease. However, you can rest on the following laurels – for a green lease to be effective, it must incorporate specific green goals and outline mechanisms for measuring performance to assure that the goals are met both initially and continue to be met throughout the term of the lease. It should also provide for allocation of costs for achieving the sustainability standards identified by the tenant and the landlord, offer appropriate remedies if one of the parties does not sustain his end of the deal, and take an integrated and holistic approach to the green process.

Why Landlords Resist Green Leases

Unfortunately, retrofitting old buildings to make them sustainable and incorporating green practices into a lease is expensive – which is why landlords don’t like to go green, even if it’s something they believe in. Some reasons why you might encounter resistance to a green lease are unfamiliarity with green concepts and fear of how much they’ll cost, lack of capital to make the changes required to go green, restrictions built into existing leases and indifferent or resistant tenants. Remember that there are other tenants in the building – and that they, just like the landlord, might not want to pay what it takes to go green. Your fellow tenants are probably worried about the costs to them if you push the landlord to go green – will the changes be at their expense? They too may be unfamiliar with green concepts – they might not know that LEED certification can be obtained for an entire building or on a stand-alone basis.

Feeling overwhelmed? Click here to download a PowerPoint presentation that details the process of green leasing, created by Louise C. Adamson, a LEED certified real estate attorney with K & L Gates.

Once your lease is signed on your new or renewed office space, breathe a sigh of relief- the worst is over! That doesn’t mean, however, that there’s nothing left to do. We’ve compiled a “To Do” list for you; one that ensures that everything is taken care of before move-in day.

First and foremost: What is LEED Certification?

1. LEED Certification isThe Leadership in Energy and Environmental Design (LEED) Green Building Rating System, which was developed by the U.S. Green Building Council(USGBC)
2. There are four different levels of LEED certification (certified, silver, gold, and platinum).
3. Buildings that aim for LEED certification build their properties based on the tenants of the LEED rating system – these include the use of recycled material, reducing the amount of waste leaving a job site, using sustainable building material, and utilizing low-emitting materials.
4. Buildings who have followed the above guidelines can then submit an application for LEED certification.
5. Applications are reviewed by The Green Building Council and if accepted, are awarded one of the above levels.
6. Utilizing sustainable materials and building according to the LEED guidelines isn’t cheap.
7. There are also fees associated with applying for LEED certification

That being said, here are some things to know:

1. Most of the green buildings here in New York City tend to be new construction, and tend to be very expensive. As emphasized above, it’s expensive to build a sustainable building, and expensive to apply for and obtain LEED certification.
2. A green building = a higher price per square foot. It costs the landlord money to put the green elements in; therefore, you’re going to pay more when it comes to rent.
3. 75-80% of the buildings in New York are 80 years or older, thanks to the building boom that followed The Great Depression. These buildings aren’t at all eco-friendly. Landlords have taken measures to make them greener, such as adding new windows, but there’s only so much that can be accomplished by retrofitting.
4. Virtually every landlord is talking about going green, but few can afford to walk the walk. Consider this: a landlord would have to evacuate his tenants to make any large changes on an old building. No landlord is going to kick out tenants just to retrofit his space and make it more expensive.
5. As of now, renting in a green building won’t save you as the tenant any money – in fact, it’ll cost you more.

Wondering why any of this is important? Most people think that carbon footprint we’re creating is thanks to transportation. They’re wrong. Buildings give off 2/3 of the carbon emission in the world, whereas transportation only makes up 1/3. In short, even though going green is expensive, we can’t afford not to.