Top 10 Mistakes Companies Make When Leasing Office Space

This week I came across a blog post from a popular Silicon Valley commercial real estate blog that I believe did a wonderful job of articulating the most common mistakes that tenants make when leasing office space. The entry was posted on July 14th on SquareFeetBlog.com and proved to me that businesses seem to make the same mistakes regardless of where they're from, Silicon Valley or leasing Indianapolis office space. Instead of re-writing a similar document for my readers, I'm going to post it as it appeared on SquareFeetBlog.com and provide some of my own notes following each item ast I believe is valuable for my readers.

Following payroll expenses, facilities and related expenses are generally the second highest expenditure for a company. While people are naturally the most important asset to a company, real estate decisions should not be far behind. Too often though, companies fail to see the significance of real estate in the same light.
The impact real estate has goes far beyond the bottom line; it plays an important part in everything from employee retention to the level of productivity and workplace morale. It’s for these reasons that companies should always be cognizant when making real estate decisions.
The top ten mistakes that companies make when leasing space are:

1. Not Using a Commercial Real Estate Broker. It is imperative that companies not only understand the market, but have an advocate working on their behalf to both maximize savings and help the company meet its goals. A good broker can provide insight into the market, trends, landlords, demographics, and be a skilled negotiator. It is also important that you use a broker who is focused on commercial real estate; residential brokers often try to dabble in commercial and get in over their heads.

CARMEN: Let's take this one step further: To maximize the impact of your real estate expert, I believe it is important to utilize the services of a commercial broker that only represents tenants and DOES NOT take on landlord listings. The reasons are two-fold: First, listing agents provide on-going service to their landlord clients and thus, are paid commissions for leasing space every time a lease is completed. On the other hand, they'll only be paid once for representing you on your lease transaction. Now, who would you expect to receive the most service, the broker's tenant clients or the broker's tenant clients? Secondly, there is a tremendous potential for a conflict of interest when commercial brokers represent both landlords and tenants. Therefore, the only way to be sure your broker is looking out for your best interest is to engage a broker that exclusively represnets tenants. Further, there is good reason to be suspect of brokers that claim to "exclusively represent tenants", but their firms employ listing agents. Let's face it, what and who do you suppose these brokers are talking about at the coffee maker?

2. Waiting Too Long to Start The Process. The longer a tenant waits to start the process, the fewer the number of options that will be available to them. Waiting too long can mean that a tenant will pay more, receive less favorable lease terms, or that they are forced to leave and take less than desirable space elsewhere.

CARMEN: I'm a big advocate of businesses integrating some level of facility planning right into their on-going strategic planning process. Facilities planning, leased or owned, should be part of the continual process of managing your business. In fact, your "Tenant Broker" should be part of this process and can be invaluable in planning both physical and economic aspects of your business as they relate to your facilities.

3. Leasing The Wrong Amount of Space. Figuring out how much space to lease is not an exact science. Forecasting involves assumptions, which can often lead to costly mistakes if incorrect. Uncertain events notwithstanding, companies should take the time and effort to work with a space planner or architect to plan and program to determine the right amount of space to lease. With that information in hand, companies should then go one step further and think about the impact certain business scenarios would have on that number, the likelihood of those events happening, and adjusting the number so as to minimize the likelihood of taking down too much or too little space.

CARMEN: Once again, strategic planning! Your real estate advisor, which I hope by now you're in agreement should be a broker and firm that only specializes in representing tenants, can bring valuable resources to the table in the form of space planners and project managers to help identify current and future needs.

4. Picking the Wrong Location. What may seem like the right location might in fact not be. Companies should consider things such as access, public transportation, demographics, zoning laws, and other factors to help identify the right location for their business.

CARMEN: Simply said, try to eliminate as much of the emotion as possible when evaluating commercial real estate. Also, refer back to Mistake #2: more lead time in the search and decision process leads to better decisions.

5. Not Thinking About The Future. Aligning a real estate plan with a corporate business plan is difficult to do when milestone events and setbacks do not always go according to plan. To help deal with the "unknown", negotiating leases which provide both expansion and contraction rights to the extent possible is therefore instrumental. Companies need to go beyond the simple lease and think about sublease rights, expansion rights, rights to cancel, and options to extend.

CARMEN: See my notes regarding strategic planning after Mistakes #2 and #3.

6. Not Measuring The Space. Companies should strongly consider verifying the landlord’s square footage numbers. In larger transactions, even a small difference can translate into a large savings. If it is not possible to measure the space, tenants should at least try to negotiate a tolerance in the measurement. Generally though, and per BOMA standards, a variance of up to 2% is acceptable.

CARMEN: It depends on the size of the transaction, but it's often a good idea to have a design expert as part of the team your "Tenant Broker" assembles to design your space or at least to check the landlord's space planner's work.

7. Signing Too Long or Too Short of a Lease. Companies often think that by signing a short lease they are buying themselves flexibility. That may be true in many cases, but that flexibility often comes at a price. On the flip side, tenant’s may feel a long term lease provides maximum stability, but there are far too many cases – particularly in Silicon Valley where swings in rent can be large - where long term leases signed at the height of the market have gone so far as to force companies into bankruptcy or caused severe harm to the company. It’s therefore imperative that companies take a long-term approach to real estate, while keeping short term trends and business activities in focus.

CARMEN: This is a very important point. I can't tell you how often I've seen business owners and managers enter into lease terms (length of lease) that have nothing to do with the growth or predictable changes they're anticipating in their businesses. This disparity can kill a business, or at least add unneccessary cost. Once again...Strategic Planning!

8. Not Verifying Building Systems and Infrastructure. In today’s environment, data, power, networking, and HVAC capacity and availability are crucial. Tenants should ensure that buildings they intend on occupying are capable of providing the network connectivity and other building systems necessary for a tenant’s operation before signing any lease.

CARMEN: It is imperative for a business to fully understand its needs. If you don't have the resources on staff to do so, bring it in through vendors and the team that your "Tenant Broker" should assemble to add value to your facility evaluation.

9. Not Having Your Insurance Carrier Review the Lease Language. Tenants should always have their insurance carrier review the language within a lease that pertains to insurance and subrogation to verify that the insurance is not only attainable, but attainable at a reasonable cost. It is strongly recommended that the actual lease or lease language be sent to your insurance carrier for review before any lease is signed.

CARMEN: Could not have said it any better.

10. Not Retaining Legal Counsel. By using an attorney well versed in the documenting of a real estate transaction, companies can help avoid ambiguity and errors which could lead to expensive litigation or legal wrangling down the road.

CARMEN: I believe experience is key here. An attorney versed in commercial real estate leases will help to keep the cost of the lease review and negotiation under control.

These are by no means the only 10 mistakes a tenant can make when leasing space. Instead, it is meant to outline some of the most common mistakes tenants can make, and also what can be done to help avoid them. A good commercial real estate broker can help guide you through the leasing process. If you have additional tips, feel free to share them by making a comment.