The first step in finding the most suitable office space is hiring the right commercial real estate broker. A qualified representative will identify spaces matching your needs, negotiate the best possible deal, and help you avoid costly mistakes throughout the process.  As a business owner, you should be aware of what to expect from your broker, outside of just showing you spaces in a desired neighborhood.

The following frequently asked questions (FAQs) provide background information on how the commercial real estate process works:

When should I start looking for commercial real estate?

Tenants searching for space under 10,000 square feet should begin the process at least 6 months prior to lease expiration; tenants above 10,000 square feet should start at least 9 - 12 months prior to lease expiration.

What additional costs should I be aware of when negotiating a lease?

In addition to the base rent payment there are many other costs involved with an office lease. Understanding each additional cost's impact on your obligation can be complicated when comparing the entire lease value of one space to the next.

  • Electric – There are three ways that Electric is billed for commercial space in Manhattan.
    • Direct Con Edison – based on consumption and billed directly from the energy company
    • Sub Metering – based off of consumption, but the bill comes from the landlord with an “administrative fee” added to it.
    • Rent Inclusion – A fixed price for all electric usage, typically $3.00 - $3.50 per rentable square foot. The bill comes from the landlord.
  • Construction – Construction is a negotiable item that is often contingent on the agreed price per square foot, the length of lease, and the financial strength of the tenant entering into the agreement. The amount of work that a landlord will offer is also driven by market conditions. Be aware that construction is highly case by case for each building. Some owners are more willing than the next to perform and finance work.
  • Escalations – The most common form of rent increases is a fixed rate, typically 3% per annum. Consumer Price Index and Porter’s Wage are also utilized by some landlords.
  • Concession – Or “free rent” can be negotiated, which alters the full lease value over the term. The amount of free rent given (if any) is determined by the amount of work the landlord is performing, the length of lease and the current market conditions.
  • Security Deposit – Security deposit amounts are case by case depending on the financial strength / longevity of the company signing the lease, and the amount of capital outlay from the landlord in connection with the deal. If an owner is spending a lot of money on the installation, they will aim to securitize it with a higher deposit. In these instances, a “burn down” can be negotiated, where the landlord will return a portion of the deposit in an agreed time frame.

What is a good guy clause?

A good guy clause is a limited personal grantee that was created by landlords to forego potential eviction processes. Basically, they are written as personal guarantees, but have a single line that differentiates them as a “good guy clause.” The punch line is something to the effect of “this guarantee is null and void on the date the space is surrendered to the landlord.” This does not mean that a tenant can leave without penalty; but that the principal signing the good guy clause is no longer personally liable as soon as they have vacated the premises. The corporate entity on the lease will still remain liable.

Why is the space smaller than the square footage I am being quoted?

Loss Factor – Loss factor is the difference between “rentable” and “useable” square footage, the difference being made up by common areas such as hallway, elevators, lobbies etc. In New York City, loss factors vary from 25% - 40%, with the vast majority falling very close to 33%. 

How does the lease length impact the deal?

Figuring out the ideal length of lease is essential for your business. Typically, an established company will attempt to secure a multi-year lease at a fixed rate to allow for future budget planning. For longer commitments (7-10 years), more construction is typically offered by the landlord because it allows more time to amortize their capital outlay. For shorter terms (3-5 years), many owners make deals on an “as is” basis with some modification to the exiting layout / and cosmetic upgrades.

What paper work is required to submit with a proposal?

The most common form of documentation required are the last two years of corporate tax returns from the entity signing the lease. The strength of a tenant's financials will directly impact the lease agreement. Financially sound companies are more desirable for landlords. However, a newer business will generally be required to pay a higher security deposit in comparison to an established company with a proven track record.

What happens if I outgrow my space?

It is every business’s goal to flourish and outgrow their office space. When this happens in the middle of a lease obligation, there are multiple solutions to explore. Most landlords will make an effort to grow existing tenants within the building, or within their portfolio. Even if there is not a space readily available, it is always possible that a neighboring tenant or tenant on an adjacent floor is interested in giving up some of their own space. If there is no solution in your present building, there is the option to sublease your current space and relocate.

Who pays commission to a commercial real estate broker?

In New York City commercial real estate, it is customary for the landlord to pay brokerage commissions.

What does a tenant representative commercial real estate broker do?

If you have read the entire FAQ, you may have noticed that there are multiple references to case by case scenarios, depending on the landlord. Your tenant representative commercial real estate broker should be called on for answers to the grey areas regarding each property. Your broker is an advocate that is a professional in their field, and will not only identify locations suiting your requirements, but will also negotiate on your behalf from a position of expertise. Also, it is not uncommon for obstacles to arise during negotiations. It is your broker’s duty to find solutions, and consummate your deal with the most favorable terms possible.