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November 11, 2014 -

Emerging Growth: Negotiating Your First Office Lease

You have just closed on your financing round, and you are in the market for new office space.  Having just moved into new offices ourselves, we know that finding the right space at the right price and negotiating a lease is a long and challenging process.  Even if you have an extremely experienced and skilled broker representing your interests, leasing new office space will consume more time than you imagine.   Engaging both a broker who specializes in tenant representation in your desired location and a real estate attorney will allow you to leverage their experience to obtain the best deal for your company and allow you to continue to focus on growing your business.

Given the substantial financial commitment, you will want to thoroughly understand the economics of your new lease.  A well negotiated term sheet or letter of intent (“LOI”) is the first step.  At a minimum, it should include: base rent, other pass- through expenses the tenant is responsible for paying, any free rent, security deposit, lease term, early termination options, expansion options, condition of the space and improvements the landlord will make prior to move-in, who funds those improvements, the anticipated delivery date for the new fit-out space and if personal guaranties are required.

After a few weeks of back and forth you have a 3-page term sheet covering all of the above business terms.  So why do you need an attorney?

Answer:  To make sure the 35-page lease you just received actually matches the business terms you negotiated. Also, to read and negotiate all the other provisions that are not addressed in the term sheet, but will have a substantial impact on your economic deal and your use of your new office.

For instance, you agreed in the LOI to pay a proportionate share of operating expenses.  That term seems clear.   But how is your proportionate share being measured?   What if the building is not fully leased?  Is it a “net lease” or do you only pay for operating expense costs in excess of a base year amount? What is included as an operating expense?   A landlord’s lease will include everything but the kitchen sink. It may even include sinks – in hallway bathrooms, janitor closets and the landlord’s leasing office in the building.  Exclusions to allowable expenses should be added so that you are only paying for true operations of the building and not funding landlord’s operating costs or capital improvements (such a new marble lobby) that increase the value of the landlord’s asset. If expense forecasting is important for your business, there should be a cap on increases in controllable operating expenses.

A letter of intent or term sheet will not typically address the following questions:

  • Will you be able to host tech meet-ups in your office after business hours? (Not if there is a narrowly defined permitted use clause in the lease.)
  • Will your employees who cycle to work be able to store their bikes somewhere in the building or bring them in the elevator to store in your office?  (Office building rules usually prohibit bicycles in the building.)
  • Will your staff be able to work on weekends or late evening hours? (Not if access rights, elevator service and electricity are only provided during “normal business hours”.)
  • Will HVAC be provided on the weekends? Will you be able to control the HVAC during non-traditional business hours or will you need to notify the building manager in advance and pay extra?
  • Are you allowed to decorate your office using wall wraps or graphics?
  • Can you put up a cool sign outside your office entrance? Will your company be listed on the directory in the lobby?
  • Will you be able to sublet or license extra office space to another start-up if you don’t need all of it right away or if you need to downsize in the future to defray the cost of rent?

While not addressed in a letter of intent, these items are important to the value of your lease, your company’s day-to-day work environment and your team’s productivity. These are just some of the questions that an experienced real estate attorney knows to ask you.  And once your needs are understood, you attorney will negotiate provisions into your lease to address them ahead of time, when you have the most leverage.

Laura Sorscher, a partner at Baer Crossey, has years of commercial real estate experience.  Last year, Laura worked side-by-side with our client, Curalate, to secure the lease for its expanded office space in Philadelphia.   And this summer, they called on Laura again to negotiate a complicated sublease for their new office location in New York City.  Apu Gupta, CEO and Co-Founder of Curalate, was happy with the result, stating “as a rapidly growing startup, Curalate is chronically understaffed and frankly had no experience in dealing with real estate.  Laura had our back.  She educated us, fought for us, and handled the details.  We couldn’t have asked for more.”

Call Laura directly at 215-964-9847 or email her at lsorscher@baercrossey.com if you are contemplating new office space, need recommendations for a good tenant broker in the Philadelphia area, have questions about your existing lease or any other real estate matters.