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.
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.
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.
The 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.
We’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.
Looking forward to a new chapter in your business, you just moved into your new office space. Your old office building is, however, haunting you after receiving an invoice from your prior landlord for restoration obligations. Most office leases contain a relatively innocuous provision commonly referred to as the “Surrender Clause” which spells out the obligations of the tenant to restore their premises to a certain condition upon lease expiration or termination. Many tenants pay little attention to this provision in lease negotiations based on the conventional wisdom that the landlord will likely demolish their space and rebuild it for a new tenant. In this post, I outline what tenants should consider in limiting their liability when surrendering their premises.
The trend of companies moving to urban areas in search of younger talent has challenged some suburban based companies, landlords and suburban governments in the Chicago area and across the country. Earlier this year, I posted a blog examining the trend of urban migration in Chicago and nationally: Corporate Office Urban Migration – Chicago & Nationally. While the Chicago area is well connected with mass transit (including an extensive rail system), the challenge has been for commuters to get to and from the rail line. That’s particularly been a detriment for suburban companies trying to recruit “car-less” millennials whom live in Chicago. While there’s train service for reverse commuters, the transit from the train to suburban office parks is a challenge. Recently, however, a Chicago area based company, along with the support of DuPage County and the Regional Transit Authority (RTA), has piloted a car-share solution at a local train station to improve transit connectivity.
Occasionally, we hear of a tragedy where a bomb explodes in a former war zone. Likewise, in commercial real estate where most markets have recovered from the recession, there is a time bomb of building ownership that can be disastrous for office tenants. That ownership structure is a TIC (Tenancy-In-Common). In this post, I outline what is a TIC, the challenges they present and how tenants can safeguard their interests.
On the heels of the great recession in December 2010, I wrote about whether the trend of office tenants moving to urban areas is a secular shift or an aberration (“Downtowns Drawing Tenants Over Suburbs: Secular Shift or Aberration?“), concluding that companies that are location neutral (i.e., don’t need to be suburban or urban) will be driven by qualitative factors including, most importantly, labor. Here in Chicago and many other markets nationally, we’ve seen an increasing number of companies relocating all or a portion of their operations to the Central Business District (or surrounding areas). Most recently, it was announced that McDonald’s Corporation will relocate their HQ from west suburban Oak Brook to Chicago. With urban office rents being considerably higher than suburban, these companies are not looking at real estate from purely a cost perspective, but rather how it can be a strategic tool in driving their core business. In this post, I summarize the reasons underlying this trend, what we can expect in the future and what is happening in Chicago as an illustration of this national and global trend. I also explore why some companies have decided to stay in the suburbs.
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.