If you’re a medium or small sized business looking for office space in New York City, your two biggest expenses are going to be your employees and your monthly rent. In some dire situations like what we’ve seen during the pandemic, you may be able to let some of your employees go to ease your financial burden, but there is no easy way out when it comes to paying rent. Therefore, the better of a deal you can negotiate, and the better your relationship is with your landlord – the more likely you will survive unscathed or even come out on top.
There are two sides to any real estate negotiation, but regardless of what you might’ve heard, those two sides are rarely equal, and just like life, negotiation for office space isn’t always going to be fair.
First things first – who are you, and who is the landlord? If you’re looking for 1,000 square feet in a 150,000 square foot property, how much do you really think a landlord is going to bend to your wishes? The reality is, the more space you rent, the more money you can bring to the landlord’s bottom line, and the more powerful your side of the negotiation will become. On the flip side, the larger the landlord and the more desirable the location, the more power your landlord will retain when negotiating your commercial lease.
To make matters more difficult, tenants shouldn’t be surprised if some landlords require a payment from you, to even begin drafting a lease and commence negotiations. This is especially true when it comes to larger landlords. The post-Covid silver lining is that this practice has become much more rare.
Most landlords try to maximize what’s called their ”net operating income to debt ratio”, which in plain English means the amount of net rent income to be applied to the principal and interest payment made on their mortgage loans. Your landlord wants the most, and you want to pay the least, for base rent.
This is where the market comes in. Brokerage firms such as Metro Manhattan Office Space that specialize in representing commercial tenants will increase your chances of negotiating favorable business terms. A knowledgeable broker will provide you with essential data and leverage during the negotiation process.
If you’re trying to bargain down the landlord from $55 per square foot, but asking rents for similar properties in the area are $60 per square foot or greater, this will naturally make your negotiation more challenging. Your offer is likely to get rejected unless you offer some compelling incentives to the landlord to accept a lower rent. Such incentives can include taking the space in “as is” condition, offering a longer lease term and/or offering the landlord a tenant with extremely strong financials.
It should be obvious to most tenants that all landlords of commercial office spaces in New York City try to operate their buildings in a profitable manner. These are businesses after all. Therefore, additional rent items like paying tax increases, insurance increases and a percentage of common area maintenance costs are going to be standard commercial tenant rent expenses.
In negotiating these items, you want to make sure that the percentage you pay is equivalent to the percentage of space you are taking in the property. It might behoove you, depending on the size of the rental and your available funds, to confirm the actual percentage of office space that you’ll be taking. It isn’t unheard of for landlords to exaggerate these percentages.
Traditionally, office landlords in New York City have preferred long-term leases of three, five, or even ten years. The longer your lease term, the better of a deal you can negotiate for your company. When a landlord has the opportunity to get a desirable tenant into their building, such as a tenant who can easily fulfill their financial obligations long-term, they’ll want to keep that tenant for as long as possible. The first reason is obvious – to ensure cash flow. But secondly, because banks prefer longer term leases when they are lending money, and part of their loan underwriting—the determination of how much to lend – is based on the lease term.
What’s changed in 2021, is that many landlords are now highly motivated to fill vacant spaces left behind by companies that have downsized, relocated, or gone remote. This means that landlords might be more open to shorter-term leases, which opens up new opportunities for startups and businesses in the early stages of growth.
Good Guy Guarantee
A Good Guy Guarantee (see our video on this topic) is a limited personal guarantee. An individual is guaranteeing that the tenant (the company) will pay the rent while they occupy the space. So if the tenant breaks the lease, they must be current on the rent at the time they vacate the space. They must return the keys to the landlord and leave the space broom clean. They usually have to provide the landlord with a few months’ notice so they have time to re-let the space. If these conditions are met, the obligation of the Good Guy Guarantor ends.
Let’s talk about tenant improvement allowances and build-outs.
When signing a new office space lease in New York City, you might want to take the space “as is”, or you might need the landlord to perform upgrades and renovations before you move in. Having your landlord build out a space on your behalf will likely translate into a higher rental rate. If you plan to upgrade or renovate the space, you will need to provide a description of the work you will be performing in offers to landlords.
If your lease agreement has the landlord responsible for building your space, a work letter will detail the landlord’s work.
Your landlord may also offer you what’s called a Tenant Improvement Allowance (TIA) to get this done. Make sure that you go into as much detail as possible regarding what improvements you’d like to make, and have your broker review these details with the landlord in detail.
If you take the space in “as is” condition, you should expect lease terms that will require prior landlord approval, such as licensed contractors and lien waiver sign offs – which means that the contractor has been paid by you, and they waive the filing of any liens against the landlord’s property. Further, you should expect to be responsible for the acquisition of any permits required by your alterations and buildout.
Rent abatements and escalations
There is usually an abatement clause in a commercial lease, which in plain English means that if there is a fire or other damage to the property, your lease payments will be temporarily reduced in proportion to the amount of space that is still usable. After our recent experience with the pandemic, it’s really helpful if your broker can get the landlord to add “Governmental Shutdowns” to the events which would trigger a rent abatement, but don’t consider it guaranteed. This type of language is especially important for retail office space such as restaurants, spas, fitness centers and similar businesses that rely on foot traffic to stay profitable. Talk things through with your broker or lawyer and make sure your lease included early termination and sublet and assignment clauses to keep you protected from unforeseen events.
I’ve mentioned that a landlord wants to keep their buildings profitable, and besides additional rent items, they want the payment that they get, to keep up with inflation. So expect to see approximately a 3% per year rent increase when it comes to rent escalations.
Most landlords are generally reasonable and you can negotiate a fair deal with them as long as you show diligence, serious intent, have good financials and your use conforms with the building. They are running a business much like you are, and they will reject terms that are overly unfavorable to them – the same way that you would. Having an experienced broker next to you will help protect your interests and increase the chances of having your offers accepted. This can save you considerable time and expenses.
Don’t rush and consider the help of an experienced broker
Like any business owner, you’re looking for the best office space for your business. If you don’t take the necessary time to negotiate the items discussed above, you could very well end up in an unfavorable situation. You’ll be negotiating with landlords who are professionals at what they do. For this reason alone, make sure that you protect your own interests by enlisting the help of a reputable broker who knows the ins and outs of the market, and have a law professional go over all the details to address all concerns before signing the lease. Keep in mind that any negotiations will need to factor in current market conditions, the landlord’s financial situation, the competition and demand for spaces in the area, and your desirability as a tenant.
If you’re looking to rent office space in Manhattan, make use of our 17 years of experience operating in Manhattan. Contact us today. We will help you find the right office space for your business needs.