Lease AuditPre-lease IssuesRent

Tenants: Are You Ready for the New Lease Accounting Standard?

2019 is a big year in lease accounting.  In 2019 (which began December 15, 2018 for fiscal year reporters), publicly traded companies are required to comply with the new accounting standard (ASC 842) and are required to recognize leases greater than 12 months on their balance sheet.  In 2021 (beginning on December 15, 2020 for fiscal year reporters), all other entities (i.e., private companies including non-profits) will be required to comply with this new standard.  Note, given the challenges facing compliance, FASB recently agreed at their July 17, 2019 meeting to extend this effective date for private companies from 2020 to 2021.  It is expected that over $2 Trillion will be transferred to US companies’ balance sheets.  As I previously wrote (Lease Accounting Change Gets the Go-Ahead ), financial transparency is the driver of this new standard which was developed in the wake of the great recession.  “We believe that this new standard is important because it will provide investors, lenders and other users of financial statements a more accurate picture of the long term financial obligations of the companies to which they provide capital,” said FASB Chairman Russell G. Golden.  Now that it is official, in this post I highlight what office tenants should be doing to comply with this new standard.  I am joined on this post by Mirela Gabrovska of MBG Consulting, a national expert in lease administration and auditing.

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Tenant Build-out

Is the Open Office Plan Dead?

Last year a Harvard Business School associate professor (Ethan Bernstein) led the first empirical study measuring both face-to-face and electronic interaction before and after two Fortune 500 companies moved to an open barrier-free workspace.  Contrary to conventional wisdom, the study found that, with the open workspace, personal interactions dropped approximately 70% while electronic interactions increased between 22% and 50%.  After this study was released (which some industry professionals have challenged), countless articles have been written that the open office plan is another misguided corporate management fad and the real reason for its adoption is to reduce costs by densely packing workers into a smaller space.  While there’s certainly a cost benefit to a more open plan with a smaller footprint, particularly as rents in many markets are hitting historic heights, in this post I briefly discuss how a thoughtfully-crafted open office plan can increase personal interaction and productivity while contributing to the retention and recruitment of talent. Continue reading

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Other Lease TermsSubleasing and Assignment

Is Co-Working the Right Choice for Your Business? Office Space Alternatives for Tenants Today

Co-Working companies have been big consumers of office space over the past few years.  For example, WeWork is now the largest occupier of office space in NYC leasing 5.3 million square feet. Investors are pouring billions of dollars into these companies as recently reported by the Wall Street Journal  where SoftBank Group committed an additional $3 billion to WeWork which would boost its valuation to $45 billion.  In addition to traditional office buildings, underutilized retail space is taking advantage of the trend by re-purposing empty storefronts and suburban shopping malls into co-working spaces.  Even big box office supply giant, Staples, is getting in on the game, as it contemplates closing 70+ locations. Partnering with Workbar, they are creating co-working spaces within their store that will offer high-end work spaces, meeting rooms, private areas, printers and Wi-Fi along with networking opportunities.

While the sector may have excess supply, this way of working is here to stay because it provides: (1) Service, transforming the product of office space into a “service”; (2) Flexibility, given today’s fast changing business and product cycles; and (3) Community, fostered among sometimes complimentary businesses.  For these reasons, co-working is being adopted by many Fortune 500 companies and is no longer limited to start-ups.  In this post, I address the advantages and disadvantages of co-working and what other work space options are available to tenants as landlords have recognized this shift in tenant demand.


It is important first to understand the legal structure underlying a co-working arrangement.  With co-working, the co-working operator signs a long-term lease as a tenant on a large space with the building owner, where the co-working operator constructs and fully furnishes the space. Unlike a sublease where a property interest is transferred, co-working agreements are typically licensing agreements (commonly referred to as “Office Service Agreements”) with the co-working user paying a premium over the direct rent under the lease between the co-working operator and the landlord. These agreements are analogous to gym memberships or an agreement for hotel accommodations. While co-working has been around for over 20 years with shared office providers and incubators that are industry specific, over the past several years it has expanded greatly being used by start-ups to Fortune 500 companies.  Like anything, it’s not a one-size fits all office space solution.  As many co-working companies offer daily trial memberships, you may want to take one for a test drive.  Also, as these co-working companies pay brokerage fees to your agent at no added cost to you, it behooves you to have your agent include co-working options in any search for office space.

Advantages Here’s what companies find appealing about co-working spaces:

  1. Flexibility – Unlike traditional leases which are typically at least 3 years and most often longer, co-working space agreements are 12 months or less.  This is particularly advantageous to new companies where they have little visibility on the growth of their business.  It also appeals to some established companies that require a satellite office where there may be changes.
  2. Speed – Move-in ready, fully furnished.
  3. Minimize Costs – As there are typically minimal security deposits, and they can avoid the costs of furniture, office construction and take advantage  of shared amenities (i.e., office equipment, conference rooms, kitchen, etc.) while being located in a desirable building.  This is also particularly important for new companies that want to keep their capital invested in their business.
  4. Amenities – Amenities commonly found in major tech firms in Silicon Valley are commonly incorporated into co-working spaces.
  5. Community/Networking – Symbiotic environment of complementary businesses, business networking, in-house seminars (i.e., “Lunch & Learn”).
  6. National/International Access – The larger co-working companies may offer access to co-working centers in other parts of the country and/or globally for those companies that travel often.

Disadvantages – Companies find the following trade-offs with co-working spaces:

  1. Higher Costs – The advantage of flexibility and a fully furnished space comes at a premium. Think of a hotel, while it has all of the conveniences, to reside there full time is expensive.  This is particularly evident when your business needs space for more than 10 or so employees, depending upon the market.
  2. How Much Space am I Getting? – Unlike a traditional office lease or sublease where the size of the space is a key term, in co-working arrangements, what is listed as a private office or work space is typically not defined in square feet. As co-working operators are looking to maximize the density of the overall space, most co-working private offices and work spaces are much smaller than what you’d typically find in a traditional or private office.  For example, I recently reviewed one co-working space where a 150 sf office was designed to house 5 people where the monthly cost was nearly 5 times the rent for direct space in the building.  While that includes use of shared amenities and areas, that remains a large premium.  For some businesses, the premium is worth it in terms of timing, flexibility and community.  In exploring co-working spaces, be sure you compare “apples to apples” by examining the size of the work space you’ll be working in.
  3. Distractions & Lack of Privacy and Security  – Relative to the dense nature of the space and co-habitating with other businesses, there is less privacy, which can be an issue for companies handing confidential information (i.e., lawyers). Security is also a concern that must be addressed as to data, physical assets as well as confidential documents. There are also the distractions caused by noise from others which can be amplified if the space was not built with acoustics in mind.  To create a sanctuary from the noise, “privacy pods” have been created which are in very high demand, with some co-workers waiting 30 minutes to use them to make a confidential phone call as was recently reported in The Wall Street Journal – “The Best Spot in the Office Is a Phone Booth – If You Can Get Into One” 
  4. Lack of Identity or Brand – In a shared space, there is a challenge to create your brand and identity in the space.
  5. Work Hours May be Limited – Particularly as a start-up, you’re working long hours; however, some co-working spaces have limited business hours (i.e., 8 am – 5 pm, weekdays).
  6. Little Room to Negotiate – Unlike an office lease or sublease, the co-working agreements are not very negotiable.  While they are short-term, you should carefully review them with your tenant adviser and attorney.  Be careful as some of these agreements have automatic renewal periods.


Unlike co-working agreements, subleases involve a transfer of a property interest. It is important to note that a sublease is actually a 3-party agreement among landlord (master landlord), tenant (master tenant/sub-landlord) and subtenant.  As a middle ground, businesses should explore subleases which offer some of the advantages of co-working without some of the disadvantages.  Subleases, however, are not without their trade-offs.

Advantages – Here’s what companies find appealing about sublease spaces:

  1. Flexibility – Typically a sublease is a shorter term, however, there are some longer subleases in the market which will be similar to a direct lease.
  2. Speed – Commonly move-in ready and fully furnished.
  3. Lower Costs & Capital Expenditures – Many times subleases are furnished and fully constructed with minimal (if any) security deposit. Depending upon market conditions, rents are usually discounted from the rate under the prime lease between landlord and tenant.
  4. Create your Brand – As this is a company’s private space, you can create your own identity subject to the terms of the sublease which may require consent of the sub-landlord and/or master landlord.
  5. Privacy – Since you are not sharing space with other companies (unless the sub-landlord retains a portion of the space for its use), privacy is assured as is the lack of external distractions.
  6. 24/7 Access – As is typical in most office leases, if you need to burn the midnight oil, they can do so 24/7.

Disadvantages  Here are the challenges of subleases:

  1. Needle in a Haystack – The space may not align with all of a company’s space requirements, so you may need to be open-minded
  2.  Subordinate – No direct landlord relationship as subtenant is subordinate to master tenant. If master lease is terminated, then so is the sublease. See my blog post Subtenant’s Guide to a Great Deal.
  3. Lack of Community & Networking – Other than networking with fellow tenants in the building, there are fewer opportunities for internal networking; however, subtenants, in creating their own brand, are also creating their own sense of community.
  4. Lack of Amenities – Unless the building offers the amenities in its tenant lounge and building fitness center, you may not have access to the rich amenities found in co-working spaces which help in hiring and retaining employees. Note, in highly competitive office markets, landlords are in an “amenities arms race” – see my post Office Building Amenities Arms Race.
  5. 3-Party Dance – With the added layer of negotiating with the landlord to consent to the sublease, and with the landlord collecting rent from the existing tenant (sub-landlord), the landlord does not share the same level of motivation to finalize a deal, so it can become a slow 3-party dance

Direct Space – “Spec Suites”

In today’s competitive leasing environment and seeing the strong demand in co-working spaces, landlords are pre-building and furnishing offices (from small suites to full floors). These are commonly referred to as “Spec Suites”.

Advantages – It shares all of the advantages of subleasing; however, rents are not discounted and lease security is of greater importance.  Unlike subleasing, the company has a direct relationship with the landlord.

Disadvantages – Here are the challenges of a Direct Space Spec Suite:

  1. Cost – Rent is not discounted as you’d typically find with a sublease. Also, landlords will look for security for the lease in terms of a cash deposit, but more likely a letter of credit. See my post on what tenants should consider with letters of credit Tenant Lease Security Strategies.
  2. Longer Term – Landlords are typically looking for at least 3 – 5 years of term given their investment in the space.
  3. Limited Voice in Construction & Furnishing of Space – As landlords typically have plans and furnishings already specified to meet their budget, tenants typically have less latitude to make changes.
  4. Lack of Community & Networking – See above.
  5. Lack of Amenities – See above.

Direct Space – Build to Suit

This could range from re-using a previously occupied space to choosing a raw space that will require a complete build-out.

AdvantagesIt shares all of the advantages of Subleasing; however, as is the case with Direct Space Spec Suites, rents are not discounted and lease security deposit is of greater importance.  Unlike Spec Suites, the tenant can customize the space to suit its needs.

Disadvantages – it shares all of the disadvantages of Direct Spec Suites, excluding limitations on customizing the construction and furnishings of the space.

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Building ServicesOther Lease TermsPre-lease Issues

Can You Hear Me Now? What Tenants Must Know About Office Building Cell Service

We’ve all struggled with poor cell phone service in large buildings, frequently with our face pressed to the window trying to catch a bar.  The service issue typically isn’t with the carrier, but with the obstructions within a building or neighboring buildings.  Given today’s mobile workforce where we’re using our devices for a lot more than making calls, tenants should consider this issue before renewing a lease or looking for new space. Forward thinking landlords are also concerned about this issue as they know it will affect the value of their property, which is based upon a well-occupied building.  In this post, I outline the trends behind the increasing demand of cell service, its impact to tenants, how some landlords are addressing this issue and what tenants should be doing.  Continue reading

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Pre-lease IssuesTenant Build-out

Tenant’s Guide to Minimizing Office Construction Costs

As the economy continues to expand (along with office tenants), office construction costs continue to climb.  That’s due in large part to the strong economy as well as a shortage in construction labor and certain materials. In this post, I outline strategies for tenants to minimize their office construction costs.  Thank you to Bill Conopeotis and Liz McCleary of ConopCo Project Management for their input on this post as well our long-time client Erik. Continue reading

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Pre-lease IssuesSubleasing and Assignment

Subtenant’s Guide to a Great Deal

Looking for a great deal on office space?  A sublease may be the answer.  Subleases are often attractive to businesses as they offer a low cost, flexible, turnkey solution.  Start-up companies and established companies can find subleases to be a great opportunity.  They are, however, not without challenges and risks.  In this post, I discuss the advantages and disadvantages of subleasing and how businesses can navigate the sublease process to get a great office space that will help propel their business. Continue reading

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Forms of SecurityPre-lease Issues

Tenant Lease Security Strategies

As commercial real estate values are rooted in a dependable cash flow, landlords (and their lenders) are keenly interested in the creditworthiness of their tenants.  As most businesses are not in the Fortune 500, many will face the issue from prospective landlords of how they will secure their financial obligations under the lease.  Where landlords are increasing their construction allowances to address rising construction costs, lease security has taken on increased importance for tenants today.  It should be addressed early in the business negotiations when multiple properties are under consideration.  A tenant’s business is best served when they can put more of their money to work for their business instead of having their money held hostage by their landlord.  In this post, I outline the three primary approaches to lease security: (1) Cash Security Deposit; (2) Letter of Credit; and (3) Guaranty. Continue reading

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Lease AuditOther Lease TermsPass-throughs

Limiting the Hidden Costs of Office Rent: Operating Expenses & Taxes

A major component (30% or more) of an office tenant’s rent bill is property taxes & operating expenses (“T&O”) which today is on the rise and where tenants have limited control under landlord-favorable leases.  In Chicago, T&O is rising significantly and where most buildings quote rents on a “net” basis (which may be comparable), the amount of T&O can vary significantly among buildings.  While tenants and their advisors will fight hard on the rent and other deal terms, if T&O is not properly vetted and negotiated, those deal terms will be far outweighed by surprisingly large T&O costs. In this post, I discuss the two common rent structures and offer strategies on limiting increases in T&O to provide tenants with cost certainty.  Continue reading

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Other Lease TermsPre-lease Issues

Added Transparency Needed for Commercial Real Estate Brokerage

financialThe quest for “transparency” is a major driver in our world today so that people can make the best decisions.  We saw it with banking reforms after the recession as well as with all the new disruptive technologies.  In commercial real estate, we recently saw the push for transparency with the new lease accounting rules.  Commercial real estate brokerage, is a sector in need of increased transparency, particularly given the continued consolidation of commercial real estate brokerage firms where it is increasingly common for opposing parties in a transaction to be represented by agents from the same firm.  Beyond this conflict of interest issue, greater transparency is needed as to compensation and “incentives” offered by property owners to entice agents to show a particular property. Continue reading

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Building Services

Office Building Amenities Arms Race

MarketplaceWe’ve all heard of the rich perks leading tech companies offer their employees – from gourmet food to full-service gyms.  Borrowing a page from these companies, office landlords are offering many of those perks to their tenants as added amenities as they look to lease-up their buildings and increase rents.  While their interests diverge, today’s office landlords and tenants (not just the Googles of the world) share a simple mission: create a workplace where people want to be and where they thrive.  That’s particularly the case today where everyone is looking for ways to retain and attract millennials.

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