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. 

Office Building Tour Checklist

While your ultimate decision on leasing office space will be based upon how it supports your business goals, the building tour is an initial litmus test.  A thoughtful inspection of a building and space may identify potential issues that you can address early on in negotiations as well as avoid dead-ends.  Before you look at new office space, here are some “do’s and don’ts” to consider based upon my 20+ years representing office tenants in Chicago and nationally.

Tenant’s Lease Renewal Strategies

Lease renewals are one of the most profitable leasing transactions for landlords.   As most tenants look to renew their lease to avoid the disruption associated with a relocation and as landlords perceive existing tenants as a “captive audience”, I’ve outlined below 10 steps for tenants to employ so as not to leave money on the table based upon my 20+ years representing office tenants in Chicago and throughout the country. 

Office Tenant Letters of Intent Strategies

The best time for a tenant to negotiate key lease terms is before the tenant negotiates the lease.  After a tenant requests the landlord to prepare a draft lease (on its landlord favorable form), the tenant has signaled to the landlord that it has committed to the building and consequently loses market leverage.   As office leases and the entire leasing process is decidedly tilted toward landlords, to level the playing field, tenants should negotiate a detailed Letter of Intent (“LOI”) memorializing all business terms and key legal terms to serve as the “blue print” for the lease draft.  A well negotiated LOI will maximize lease concessions for the tenant as well as save time and money in the lease drafting process.  Additionally, the inherent process of negotiating an LOI, will tell you a lot about the landlord and their “hot button” issues, etc… Discussed below are strategies that tenants should employ to effectively negotiate an LOI.

Tenant’s Guide to Navigating Landlord-Favorable Office Markets

With the start of the new year and with the stock market continuing to break new levels, there’s a strong sense of optimism in our economy.  As office vacancy mirrors employment rates, we are seeing vacancy rates continue to fall and rents rise nationally.  Like the stock market, the office leasing market has its ups and downs.  Maybe as an office tenant you were fortunate to lock-in low rents for a long term.  But as companies grow, the demand for office space continues.   Having 20+ years representing tenants during the office leasing cycles, here are some ideas on how to best navigate today’s increasingly landlord favorable markets.

Transparency Coming to Office Buildings’ Internet Connectivity

wifi-highspeedReliable high-speed internet access is mission critical to businesses today.  With rapidly changing technological improvements from video conferences to 3-D printing, a building’s connectivity must be vetted by tenants early in the site selection process as a key infrastructure element with the same level of due diligence as are utilities and HVAC.  Unfortunately, there has been a lack of transparency as to buildings’ internet connectivity which can vary greatly.  Moving to a building with inaccurate information about a building’s internet connectivity can lead to unforeseen costs and delays, not to mention loss of business.  That, however, is changing in New York and soon in Chicago as well as other cities across the country. 

The WELL Building Standard® for Your Well Being

How does your office space affect your health?  If you think about it, most office spaces and buildings are designed to minimize the physical activity of its occupants.  While many office spaces today are certified as meeting the sustainability standards of LEED, that does not necessarily equate to an office environment positively affecting its occupants’ health.  Since its introduction, we are seeing many of the LEED sustainability standards incorporated into building codes and construction practices.  These standards fulfill two primary objectives – preserving the environment and saving money.  While it is assumed that they benefit the occupants’ health, that’s not necessarily the case.  To help combat the national obesity epidemic and rise in the diagnosis of chronic diseases, new building standards are being introduced to focus on how the physical environment supports the occupants’ well being.  Outlined below is an overview of The WELL Building Standard® (originated by the Delos Group, a New York developer) and what it means to office space occupiers.  In my next post, I will address a broader healthy building standard from New York City. This standard, known as the Active Design Guidelines, was developed in a public-private partnership in 2010, which was supported by Mayor Bloomberg, and led to the 2013 launch of the non-profit Center for Active Design.

Loft Tenant’s Leasing Checklist

loft buildingMany creative and technology companies gravitate to loft office buildings due to their unique character as they are typically renovated warehouse buildings (either concrete or timber construction).   In addition to the usual office building due diligence, below is a checklist that tenants should use in evaluating loft office buildings.  To thoroughly evaluate a loft office building, a tenant should consider the assistance of a knowledgeable tenant representative, project manager, architect, engineer and general contractor.

Tenants’ Top 10 Office Leasing Mistakes

As real estate is typically one of the top costs for companies, here is a list of the top 10 mistakes tenants make in leasing office space.  The real estate decision, however, goes beyond cost.  It also impacts the bottom line in terms of employee productivity as well as employee retention and recruitment which is becoming more and more important today.  This is based upon the joint experience of me (being an attorney by background, with 20 years of representing office tenants locally and nationally) and nationally recognized commercial real estate attorney Ted Yi, Co-Managing Partner of Quarles & Brady, with over 25 years representing office tenants and landlords (locally and nationally).

Not Your Father’s Office – Office Space Trends

In the late 1960’s, Herman Miller, an American manufacturer of office furniture and equipment, spawned the idea of office cubicles.  The cubicle’s popularity was sustained until about 10 years ago, when companies began to notice that the way in which people worked was changing; people were collaborating in small teams as well as relying on portable electronic devices that do not require that they be “tethered” to a fixed workspace. 

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