4 Mistakes to Avoid Before Signing an Office Lease

Chris: All right. Well, hi everybody. I’m Chris Welch.

Doug: I’m Doug Twyman.

Chris: And today we’re going to talk a little bit about one of the biggest investments you can make as a business, which is finding a new office space and building it out. We have a little bit of background in this space with Design Alternatives, a commercial interior design-build firm. We’ve been in business for 35 years and this is really all we do. We focus on commercial design-build, from interior design to procurement and construction. And Doug, what’s your background?

Doug: I’ve been a commercial real estate adviser with Colliers for 42 years, and I advise tenants on making informed decisions on their real estate activity.

Chris: Awesome. Well, we really want to spend this time with everybody to level the playing field for tenants, because, Doug, as you pointed out, the people who are negotiating these leases on the other side of the transaction are experts at this. They do this all day, every day. And so how do tenants stand a chance to really get the best negotiated terms for their business? That’s really what we want to spend our time doing, sharing some of the gotchas that we’ve seen in our experience doing the buildout and also the transaction side. So we kind of see both sides of this, and we want to offer some advice and some help and what we’ve seen.

Doug: Yep. Educating tenants and, as Chris said, leveling the playing field. Landlords seem to be experts at doing this and have a lot of background and knowledge. So we’re sharing our knowledge and expertise to help you get a better deal.

Chris: All right. How do we level the playing field? During this session we’re going to build a road map of four points that we think will help arm people who are in the business, and those who are exploring even six to twelve months from now. I think one of the key lessons is that the earlier you can do this, the better. Plan early.

Doug: Yeah. Plan early, get the right team, and build a plan so that you really know what you’re looking for.

Chris: You really know what you want, so that you can go in and put your best foot forward in the negotiation and you’re in sync with each other.

Doug: Yep.

Chris: All right. Perfect. So let’s dive in. We’re going to cover four gotchas, then we’ll wrap up and do some Q&A at the end. Before we jump into it, we’re going to be using a term, an acronym, TIA. Doug, can you share a little bit about what that is?

Doug: Sure. It refers to the tenant improvement allowance, which is a financial contribution from a landlord or property owner to fit out the space or design the space to a tenant’s needs. It could come in the way of a check. It could come in the way of part of the negotiated rent. And it’s one of the most important things to consider in a relocation.

Chris: Got it. So this is a big part of the financial package that is involved in negotiating a lease. Really the goal here is to get the biggest TIA possible.

Doug: Right, at a resulting rent that’s within your budget and projections for costs.

Chris: Perfect. Yeah. So a lot of what we’ll talk about is how you maximize this TIA, both from a term perspective as well as a buildout perspective. All right, let’s do a little audience poll before we get too far into this. If you are looking for a space, I see some of the folks in the group here are industry pros. Good to see many of you. I’m going to launch a poll here. If you’re looking for a space, when are you hoping to be in your new space? All right, we got some data points coming in. If it’s next week, I think we have some issues. But Doug’s available. I’m sure he’ll take the call.

Doug: Absolutely.

Chris: All right. Awesome. And then let’s do another one here. What’s driving the change? If you are looking for a new space, this will really help us to calibrate the conversation a little bit. Some of the reasons that people make a change are, one, they’re just tired of their space, right?

Doug: Right. Gets stale, gets old, it’s not functional for your business anymore. Maybe the location isn’t right. Property has been sold, not managed properly, issues with air conditioning, janitorial things like that.

Chris: Is that a big reason why people change, that kind of problem with management?

Doug: It is one of the major reasons, absolutely. That and uncomfortable conditions within the space. Maybe poor maintenance, lack of attention, and also the fact that the space just doesn’t work for them anymore. You don’t want to be in August in New Jersey and not have AC that works, or in January and they don’t plow the parking lot.

Chris: Oh yeah, you don’t want that. All right. Good. Well, thanks everybody. Looks like there’s a mix of layout and collaboration, growth, and consolidation. That gives us a little help here on what everybody is looking for.

Doug: Yeah, I might point out that on the costs, the letter E, it’s kind of a generic statement, but cost could be the same by reducing your footprint, taking less space, and moving to a nicer building. We find a lot of that with the clients that we work with. It’s about being more efficient with your space and not paying for surplus space that you don’t need. So that’s another reason.

Chris: Perfect. That’s a great point. All right. Well, why don’t we jump into it? Doug, why don’t you go through the first gotcha here? Tell us a little bit about this.

Doug: Sure. When we talk about a short lease, in my experience dealing primarily with office tenants, the time horizon is three to five years. If you’re looking at a shorter time horizon, it gets very difficult, if you’re relocating, to achieve effective economics. In other words, the rent is less negotiable from a landlord’s perspective, and also the tenant improvements are significantly less. Again, if you’re five years, seven years, ten-year term, the landlord’s going to provide you much more in the way of concessions.

Chris: So how do you plan for that as a tenant, as someone who’s leading an office move? Who do you have to get involved in your firm to be able to provide that certainty and the plan that you need to be able to say, “Okay, I know what the next five to seven years looks like, if that’s really the term that maximizes that TIA”?

Doug: Sure. Certainly the C-level, the CFO, especially the folks in operations, and human resources of course is always very important. You want to have the projected headcount for growth, expansion. And you also need to… The CFO always tends to be a quarterback of strategy and spending when you’re thinking about your…

Chris: Or maybe, from your experience working with tenants, they may be still a little bit nervous about committing to five or seven years. How do they mitigate that concern? Are there clauses in a lease they can negotiate? Are there standard clauses that can maybe help them, if they do need to make a change before the seven years is up, they can make that change?

Doug: Sure. One of the things that should be in every lease is certainly an assignment and sublease clause, which can be negotiated and allows some flexibility if you need to move or downsize your space. Terminology favorable to a tenant, just like any other part of the lease. We want to help with the terms of the document so they’re tenant friendly. And also early termination options. In other words, if you were to sign a seven-year lease but you want the protection to get out of the lease earlier, we would try to negotiate the early termination option with the minimal amount of penalties. But understand some landlords are going to look at it as a shorter-term lease and it might not directly benefit them, especially some of the institutional landlords. But it’ll give you a little bit more ability to increase the TIA.

Chris: Mhm. And so it seems like the person that’s quarterbacking this move project needs to really be involving all these people early. The most successful tenants that you’ve worked with, how early are they engaging those people? Is it even before they speak to you? Is it months, quarters in advance of when they start looking seriously?

Doug: Yeah. I find normally for a tenant that’s got a decent projection of the future, they’re going to talk internally first, and then they would go out and interview brokers, advisers to help them with the process. But they’re going to have some internal meetings with C-level, human resources, like I say, operations, and then they would start to put their team together. I find a lot of times it starts with either the architect, designer, or the broker, and then whoever that person is, hopefully they’re sufficiently knowledgeable and educated that they’re going to put the rest of the team together.

Chris: Yeah. Well, you are moving offices as well, moving actually not too far away, and you’ve been helping us with that project.

Doug: Yes.

Chris: We did something similar. We had a whole series of meetings internally where we put together a document that we gave you right from the beginning of, here’s how much space we need, here’s how many desks we need. We do this for a living, so we had some benefit of knowing the process, but we were able to find ten properties that were a good fit in your very first list to us because of that, I think.

Doug: Absolutely. Yeah. The more information you put together up front, you can get into the intricacies later on with the adjacencies within the office and how it’s laid out. But you need to have a good headcount and a projected headcount for the future to understand what you need.

Chris: And one of the other things is, you throw out square footage numbers, you don’t always know exactly what you need. You might have an idea, but based upon our combined knowledge, you’re going to have a pretty good sense of what it’s going to take. There’s a range, right?

Doug: Yes. Based upon job function and so forth.

Chris: Yeah. I think that’s a great point in talking about planning, because one of the key things that we talk a lot about is, get as much done before you sign that lease as possible, because once you sign a lease, you need everything nailed down. There’s this graph that I love, which is the cost of change as your project continues. The earlier you are in the process, you can make paper changes and those are really easy, but the later you go, you start blowing things up in the project, right?

Doug: Absolutely, when you make big changes late in the game. When you sign, and we’re talking about signing the lease document and also signing off on the plans themselves, construction drawings, landlords are in the business of renting space and collecting rent. So whatever the lease says, if there’s a specific start date, they’re going to hold the tenant to it.

Chris: So no freebies, generally not. Okay.

Doug: If it’s been negotiated ahead of time with rental concessions, yes, but they have a pretty good knowledge of how long it takes to get into a space. So again, that’s why you want a good team that can… your commencement date is far enough out that it allows for some of the things we’re going to talk about today.

Chris: Yeah. Perfect. All right. Well, let’s dig into then, how do you get ready? Having a good internal plan is key. Maybe talk to us about this next gotcha.

Doug: Okay. The right team would be certainly your broker adviser, your design team, and you’re going to need a good commercial real estate attorney. That’ll come in a little bit later, but you want to have that person in place. You want to have your own internal team ready, and that would be whoever is going to be the representative to go out and review the reports that we would provide for property options, and then go ultimately shortlist and inspect properties. So there’s going to be a team on that.

Chris: Talk a little bit about the difference between a commercial broker and, in New Jersey there’s no differentiation from a licensing perspective between residential and commercial, right? What do you see as the advantage of working with a true dedicated commercial professional?

Doug: Well, it’s the track record, expertise, knowledge of the process, basically. We’ve been there, done that, and certainly there are always going to be detours along the way, but we’ve encountered a lot of them over the years, and you know what to plan for and look for. Our focus is strictly only on the leasing and sale of commercial properties.

Chris: Is there a difference between, whether it’s law or being a broker in the network, the terms, what is different between my cousin Cynthia, who’s a real estate agent, and a dedicated commercial broker?

Doug: Yeah. Well, it’s again the whole process. It’s knowing the properties, having been into the properties on many occasions. It’s knowing the landlords, their strengths and weaknesses, both in terms of the way they maintain their buildings. Landlords could ask whatever they want on rent, but it’s having that market data and market comparables, and we have an extremely strong research team and a consulting team that support us and help us with doing all the analysis. So it’s going through the process many times and just knowing how to handle it properly.

Chris: When a landlord is negotiating with somebody, they’re going to have a sense in their mind of what they want. What do you use to benchmark? You mentioned benchmarks earlier. What do you use to benchmark whether what they’re offering is market rate or not?

Doug: Again, it’s going to be knowing the way they think and looking at comparable transactions. That’s one of the nuances of being a sophisticated commercial real estate broker, especially on the leasing side. Sale information is generally publicly available, if not the next day, but very soon. Knowing lease data is something that we work very thoroughly to vet and make sure it’s accurate. And it’s not just the rent itself. It’s whatever concessions might have been made in a previous transaction in terms of free rent, TIA, and knowing that they can deliver.

Chris: Well, another big piece of this too is, when you’re going through spaces, I think many people can relate to this idea of a home inspection, right? When they’re looking to buy a new home, they would often get a home inspection. There’s really not that same kind of idea when you’re leasing space, right? You tour a number of spaces, you can maybe ask for a second tour, but then they kind of want to know, do you want to rent the space or not, right? That’s kind of the…

Doug: Sure. Yeah. So I advise tenants, when I’m on the property tour, to be very observant. You’re not just looking at the space itself, but you’re looking at the common areas of the building, lobbies. One of the areas I always encourage tenants to look at is the stairwells. If a landlord’s maintaining areas that people don’t see that often and they’re pristine, then you feel pretty good about it. On the flip side, if a building is very… you see some deferred maintenance. Ultimately you could talk to some of the existing tenants, too. There’s no better way to find out about a building than to talk to a tenant that’s lived through a space in a building you’re considering.

Chris: I like this stairwell point. This is like checking the bathroom in a restaurant to see how…

Doug: Well, yeah. Well, bathrooms in the building, too. It’s the little things that you might not think about.

Chris: That’s good. Yeah. One of the things that we’ve seen too is tenants that come to us to do their fit-outs after the lease is signed. Oftentimes, if they haven’t talked to a builder or a designer or an architect before they sign the lease, they’ll often get surprised, I think. So for us, we always encourage people, whoever it is, get a contractor, a designer, an architect, someone who’s in the building profession to advise as well. Sometimes that professional will charge you a small trip visit fee, similar to a home inspection.

Doug: Sure.

Chris: Might do. But sometimes if they’re working with you closely, it’ll be part of the engagement. So I think having that person to just have eyes on, seeing things that you might not otherwise see, because again, you’re probably not going to have the opportunity to do a true building inspection as part of your lease negotiation.

Doug: Sure. At least on the front end, at the beginning. But yeah, it’s like anything else, investing time and money on the front end to avoid problems later on that you might not foresee.

Chris: There was one example where the tenant had signed the lease already and then wanted to put a much larger kitchen and entertaining space in. They were converting from an office space to an event space, and the utilities had to be completely overhauled. It was tens of thousands of dollars to rewire everything, put a new panel in, put new services in, put new commercial outlets in, and they were like, “We didn’t expect that kind of investment,” because they hadn’t talked to anybody before.

Doug: Sure. Sure. Tenants go based upon their experience, could be their home, sometimes it’s a previous move, but they’re not sufficiently educated to what the real costs are and what’s behind the wall or above the ceiling. And nor should they have to.

Chris: I mean, that’s really not… Yeah, it’s not their business. And that’s really what we’re trying to do. I think we’re a services business. Both of us, even though we’re coming at it from different perspectives, are both services businesses, and really trying to help educate and keep people out of trouble. You can get into hot water pretty quickly, right?

Doug: No, so what I find is there’s generally a point person on the relocation, and their job livelihood can be impacted by the success or lack of success of a relocation. So we embrace the relationship with that person or multiple people very seriously, because it’s very important to them that everything go as smooth as possible.

Chris: That’s a great point. I think we think about it very similarly. They’re the star of the show and we’re the supporting cast, trying to make sure that they’re looking good to the people that they are answering to.

Doug: Right. Because at the end of the day, we’re a service provider and we go about our business, but they’re going to be in the space with their colleagues, and we want to make sure that they are appropriately appreciated and look good, right?

Chris: And I think one of the keys to that is avoiding surprises. So the fit-out or buildout process is one of those pieces that can financially be a surprise, can be a surprise from a timing perspective. Even in our business, again, when we were moving offices, having people ask, “Hey,” very curious and earnestly excited to know, “When are we moving into this new space?” Being able to have a clear answer, and these are knowable things within a range, right? And so how do you get that information? Working with a builder or contractor to help you with your space can provide some of that knowledge. There are some benchmarks, right? For us, we have seen on many occasions that $150 a square foot, plus or minus $50, tends to be a good budgetary number even before you really get into the space, just as you’re thinking, “Okay, how much do I need to be ready to invest?” And so providing those numbers to your CFO up front, that can be a way to begin to set some reasonable expectations. And these are well-known industry benchmarks that many different firms have seen in the Northeast.

Doug: Yeah, I would add to that, it can come as a shock to tenants. A lot of times when they think to themselves, “Oh, it’s paint, carpet, it’s moving a few walls.” But there’s a lot more that goes into it, as you said.

Chris: That’s a great point. I think it doesn’t have to be $150 a square foot for the entire space. So let’s say you have a 10,000-square-foot building and maybe you want to significantly modify only half of that space.

Doug: Sure.

Chris: So you’d look at that number just for the space that you’re heavily modifying, and maybe you go for the lower range for the space that you’re doing more of a paint and polish on, right? Carpet and paint. Really, the big change that drives a lot of the cost that people are surprised by is when you create new offices. Removing walls doesn’t necessarily have to be that expensive, depending on how the walls are constructed. But in many cases, offices are designed to have walls that don’t go all the way to the deck of the next floor up, and so it’s really easy to move them. But when you’re adding walls, that’s where code comes in, fire inspection comes in, electrical comes in, because you need to now provide HVAC and you need to provide fire safety and you need to provide electricity to that room. And all of those take what’s otherwise a relatively cheap wall and make it a much more expensive proposition to create that new space.

Doug: Sure. Same goes for above the ceiling: lighting, ceiling tiles, ductwork, HVAC supply and returns, sprinkler heads, and everything else that you know very well.

Chris: Yeah. And I think time frame is another thing where people underestimate the amount of time it takes to fit out a space. There’s no one hard or fast rule. It really depends how much you’re doing. But I think we’ve seen people say, “Well, yeah, I signed the lease. Can we get this fit-out done in two or three months?” There’s a lot of pieces that are involved before you even start the construction process, right? You have to get planning done, your design done. So figuring out, now that you’ve signed the lease, what is the floor plan that you want, right?

Doug: Right. Yeah. It’s multiple layers, as you well know, with the construction drawings. It’s not just the floor plan itself. It’s mechanicals, it’s electric, it’s plumbing. So the finished product, when an owner submits it to the town for permits and approval, is ten pages plus.

Chris: Easily. Yeah. So you have the permit set, which can take four to eight weeks depending on how quick your architect turns things around or your builder, and how invested your team can be. And then it could be a month or two months before you get permits approved, depending on the town. And then you’ve got to buy stuff. Bigger municipalities, Jersey City is going to take longer than a small rural town in Burlington or something, right? They can be a little bit faster. So all of those stack up in terms of months before you can even begin construction, and then you begin construction and that can be two to four months. I think that’s a reasonable range.

Doug: Yeah. Generally speaking, as long as… it depends on specialty items, obviously, whether it’s plumbing, glass, things like that.

Chris: Right. And I think having experience with people who have done tenant fit-outs, there’s a certain pace that you need to be able to achieve when you’re doing a tenant fit-out that not every contractor is comfortable with or able to kind of bear the resources down, right, to fit out that space quickly. And then also the rest of the move, right? Moving the office itself can be a month before you can really occupy the space.

Doug: Absolutely. Especially if it’s a bigger office, 5,000 to 10,000 square feet or more. One of the things I didn’t point out earlier that came to mind is how important it is to the whole process, 100%. Everything, all the communications wiring, so that’s a very important part of the team, as anyone that’s moved knows. And a landlord will tell you that they’ll do, in terms of the actual construction part of it, everything, they won’t do low voltage, which is your communications lines and wiring to workstations and so forth. So you really need to have your IT department or person, or if you outsource it, that person, on board early.

Chris: Yeah. 100%. That’s good. All right. So I mean really, these first three gotchas get us to a point where, when you are ready to have your lease, you should have a good idea, a realistic expectation, of what your team needs, who your team is. So your internal team, what they need, building that deal team for the project, and then having a realistic expectation, shortly after signing the lease and locking that space down: what am I going to be spending? How long is it going to be taking? So that you really go into negotiation putting your best foot forward.

Doug: Absolutely. Yep. Yep.

Chris: So I think that brings us to our last gotcha here, which is that TIA. Maybe talk to us a little bit about the negotiating process and what that’s like. What can people expect with a tenant improvement allowance and that conversation?

Doug: Well, looking at the TIA in the context of the overall decision-making process and negotiating process, it’s important that the tenant is going to be focused on the rent in many cases, and the rent, obviously your monthly rent, is your budget, and that’s very important. But the negotiated rent you agree to, more than likely, especially in this day and age, is not covering the whole tenant improvement allowance. So you have to look at it very early on, get estimates back. A landlord will typically provide an estimate from probably maybe one design firm, one contractor, but it’s not necessarily competitively bid. So you would hope the numbers go down at that point, but you need to understand what that number is, hopefully before you sign the lease, because it’s got to be accounted for in some fashion. It used to be terminology that space would be delivered turnkey, which would be at the landlord’s sole cost and expense, but that’s really not the case anymore.

Chris: Why is that?

Doug: Just because they kind of got even smarter and want to throw it back on the tenant, and there’s less liability and exposure on them. It’s carte blanche, you know, so they’re going to come up with a budget number. But if they provide a specific dollar allowance that is part of their out-of-pocket contribution to the tenant, that’s all they’re on the hook for. And anything above that, whether it’s understood up front or it’s because of change orders down the road, becomes the tenant’s responsibility.

Chris: What do you see as typical these days? What are negotiated terms looking like for that five-to-seven-year lease window for the tenant improvement allowance?

Doug: So one of the things that we are very cognizant of is, putting the shoe on the other foot, the way a landlord looks at a transaction. They’re going to look at something called net effective rent, which would be backing out… in most cases the leases we negotiate are gross leases plus electricity. If they back out the operating expenses and property taxes, commonly called CAM…

Chris: What does that stand for?

Doug: Common area maintenance, but it’s essentially the same as operating expenses. The landlord’s going to back that out in their analysis of the deal. And then they’re going to look at the length of lease and the allowance that they’re providing, and they’re going to put in an interest rate factor. And what’s that bring? It brings down the net effective rent even lower. And then there’s transaction costs, be it brokerage, attorneys, and permits and architecture. That’s going to be brought down to a number that they have to be comfortable with. And if they’re not, it’s going to be thrown back on the tenant.

Chris: So basically the more rent they’re charging, the more discounts they can give you. Effectively, the more profitable their starting rent, the more discounts they can give you. So I guess be wary if your landlord is offering you very generous rents, because maybe discounts or TIAs, because maybe they started really high, right? But also maybe don’t throw out a relatively rich rent either, because maybe they’re willing to come to the table and provide more concessions.

Doug: Sure. Sure. And again, concessions could be in the form of free rent, rental concessions, which are not as extensive as they used to be. It depends on the landlord. Some landlords, and that’s one of the things that we vet on the initial stage of the site inspection, is: do they have the resources to provide the tenant improvements, or are they the type of landlord that doesn’t want to spend much money but they’ll give you some free rent? And typically our experience is that whatever free rent we negotiate, that period of time is added to the lease term. So the landlord gets a little bit, they’re not quite as discounted as they would be otherwise.

Chris: Yep. So that’s another lever that they can pull, of starting rent versus discounts, but also discounts versus free months. It’s sort of a zero-sum game in some regard. It’s just what kind of mix they’re comfortable giving.

Doug: Absolutely. And I’m finding more and more a tenant is now responsible for some contribution towards the renovation, whether it’s a check up front or the landlord’s willing to, quote unquote, act as their bank and finance it over the term in the form of a higher rent, and they’re going to charge an interest rate. So a tenant’s going to need to evaluate whether they’re comfortable with that finance rate, just like you’d be going to a bank, or they just want to pay for it up front.

Chris: How often do you see a landlord being willing to, basically, be the bank to finance these tenant improvements?

Doug: Well, I find some of the stronger, the good landlords that are sufficiently sophisticated are willing to do that to a point. It’s not like an unlimited threshold. So they might provide another $10, $20 a square foot out of their pocket at, say, 7, 8% interest, but it’s not going to be unlimited, right? And even with that additional financing, that’s probably still not going to cover even 50% of the overall fit-out. Maybe it does, depending on how extensively you want that fit-out to be.

Chris: Sure. Sure.

Doug: So it’s an issue that a tenant really has to understand, because they want a space that’s going to be reflective of their culture, their brand, attractive for their employees. But it comes with a cost.

Chris: Right. Well, and that’s why we started off saying this is one of the most substantial investments that a company makes, because there are a lot of moving parts: how the space reflects the company itself, how it impacts the culture, not to mention the money and the time involved. As a design-build firm, we spend hundreds of hours collectively as a team, because we have time sheets to prove it, designing our own space, right? It’s taking a little bit longer because it’s our baby, right? And we want to make sure that it represents us as a firm well. But even for those who are not design firms, people really have an emotional connection to the space. They spend almost more waking hours anyway than they do at home, right?

Doug: Yeah, we hope so. We like to see people in their space. We’re well aware of hybrid work, which is fine, but it’s nice to have people physically in the office, and we find it depends on the industry, the time employees spend in the office these days.

Chris: Well, this is good. Let’s just recap before we go into Q&A. There are four things that we’ve talked about that are really important. One is to really understand the long-term needs of your company. No one knows that better than you. And so the person who’s driving the project internally really needs to be a good investigator and ask great questions, not just to one person but to multiple departments. What are your needs, and how will this new space support you and your organization? Second is really putting that team of experts together, people we recommend who are experts in commercial real estate, because there are differences in code, in lease length, in the style of negotiation, in the style of how you even view the spaces, that you really want to have people who’ve done this before, and also to have that network. You know everybody in the state, pretty much, it seems. And similar for us, having a bench of people who know how to execute commercial fit-outs and refreshes just makes the process go faster and reduces the risk.

Doug: Yeah, there’s other industries, as you are well aware. Commercial furniture is definitely an extremely important part of the new office. We have to blend that with the construction and the look of the space. And technology, of course.

Chris: Yeah, technology is everywhere.

Doug: Screens, video, you name it. And you have to be aware of sound and a host of other issues.

Chris: Absolutely. All right. Well, then, kind of dovetailing on that point, really having that clear understanding once you have that good team, they can give you a lot of certainty around: what is this project going to cost? What are the red flags that they see and that you need to be watching out for? And an overall time frame, so you can really begin to communicate effectively internally with your firm. And then last but not least is the negotiation. Really, everything that we’ve talked about leads up to this last piece.

Doug: Absolutely.

Chris: Which is just having strength in knowing… one thing we didn’t talk about but I think is important is, if you have a landlord who has a space that just is a little bit unloved, maybe hasn’t had a new tenant in 10 or 15 or 20 years and is going to need more extensive renovations, these are all pieces where you can have experts weigh in and say, “Hey, look, you’re going to need to bring this thing up to code and it’s going to cost X, Y, Z.” That can put you in a better position to negotiate with your landlord, because you are coming with facts and data and not just feelings, right?

Doug: Sure. Sure. One of the things you do with your clients is looking at the mechanical systems and HVAC. How old is it? When was it replaced? Roofs, anything that relates to the comfort of the space. So having a design firm involved is critical, as early on as possible.

Chris: Yeah. We like to see it as early as possible, just so we can give as much clarity… a crystal ball, a nice clear crystal ball. It’s the metaphor we use a lot.

Doug: Sure. Absolutely.

Chris: So just to wrap up here, those of you who are looking for a new space, being able to talk to folks who have done this before can give you some advice. We wanted to offer a free action planning session with the both of us, just to help you think through the process. No obligation. It just gives you a little bit of certainty around what you might expect. This is really well suited to people who don’t have a lease yet and maybe are looking three, six, or twelve months ahead of time, just so that you can come in with a really good plan. Now, if you do have a lease, what do you do when you already have a lease, Doug, and need some help?

Doug: Well, we come in and we’ll look at the lease. I will check the critical dates. One thing I also didn’t mention is that tenants don’t always move when their lease expires. If they have a real strong reason to have to relocate, whether it’s where somebody moves, you know, somebody lives, someone moved, it’s outgrowing the space and you just need to expand and you can’t do it in your current facility. So it’s not always about a lease expiration, but typically critical dates are important. We find a lot of times tenants will sign a lease and then they put it in a file and don’t refer to it. So one of the things that we’re very proactive about is, when is your option to renew effective? Because it’s typically six to twelve months from when your lease expiration would be. So what I find is tenants, they’re not moving every year, but over the course of five, ten years, something’s happening. They’re going to have a need to relocate, expand, what have you.

Chris: One of the things that strikes me is, many people in this business are relationship driven. And you said that you’ve built relationships over years with people even before they are looking to move. And I think builders are the same way, especially in the office space world, because this is a recurring revenue source for us, right? We build our brand on the quality of our relationships. So don’t feel like you have to sign on the dotted line right away. I think both of us are happy to have conversations just to kind of build that relationship.

Doug: Yeah. It could be as simple as just getting a handle on the market: what buildings have been sold lately, who the new landlords are. It’s good to be educated, because things change frequently. There hasn’t been a lot of new construction, as I’m sure you all know, because of the overall economy and oversupply of office space. But there are markets that are landlord markets right now that are strong, and they have a little bit more control. But we are savvy to that. And there’s others that are tenant-driven markets, stronger negotiating ability. But it’s just knowing the landscape of the property owners. So wherever you’re looking, definitely here to help.

Chris: Absolutely. Thank you. All right. Perfect. So let’s go into a little bit of a chat. If you go down to your bottom right corner of your Google Meet window, you’ll see a little nine-box, nine dots. You can click that. There’ll be a blue button that says “Ask question.” You can go ahead and feel free to ask any questions you have. We’ll have time for a couple of questions here as we wrap up. Feel free to post your questions. We’ll do a warm-up here. One of the common questions that we were actually talking about in the hallway with your neighbor next door, right, is: can we just refresh the space that we’re in? What do you typically see?

Doug: Well, it depends on the extent of how much you want to refresh it, because if it’s an overhaul, it’s extremely difficult to do. Think about it, trying to work and inhabit a space that’s under construction is extremely difficult. Certainly repainting walls, cleaning carpets, yeah, that’s doable, but it’s not a pleasant experience to jack up furniture and put new carpet down. And once you start moving walls, it gets very problematic.

Chris: Yeah. What we’ve seen as a builder, as someone who does the tenant fit-outs, is we can bring in a lot of people to come in, and in a very short period of time, maybe do an overnight, we’re moving furniture out of the way, we’re putting new carpet tiles down, we’re bringing everything back. And that can work. One of the things that you should think about is there’s a significantly higher cost to getting people to come overnight, and that’s not something that is our choice. This is just, when we ask people to work nights and weekends, they’re going to ask for more money. And so that could still work in your favor. I think the economics can work if you’re 60% satisfied with your space and you’re tired of looking at that carpet, or you want to reprogram a couple of rooms. Those are good opportunities, I think, to refresh the space. But like you said, when you’re overhauling the whole thing, soup to nuts, new wallpaper, new ceiling tiles, new carpet, that’s going to be tough to live in. We did a home renovation and we lived in that for, I don’t know, seven, eight months. It was rough.

Doug: I think a lot of people probably have experienced that. They can relate to that on a grander scale with commercial space. And one of the things I failed to point out in the negotiation process is trying to help negotiate rights of expansion, right of first offer on contiguous space in the building. Sometimes that is a way to plan for growth. But there are limitations with that, because it’s not an everyday occurrence. It could be a one-time option, and if a landlord is going to lease a space and they come to you six months into your lease and you don’t have any needs, then it’s out the window.

Chris: Shannon asked a question. What are some tenant improvement issues that commonly aren’t discovered until employees actually occupy the space, and how should tenants plan for those post-occupancy periods?

Doug: That’s a good one. Well, I think there’s sound issues, noise issues, because a lot of the open space environment now, you have to plan and try to understand your employees and how they work and how loud or vocal they are. So you want to try to plan sufficiently for huddle rooms, breakout rooms that an employee can use away from their desk.

Chris: I feel like this is one of those things where an ounce of prevention is better than a pound of cure.

Doug: Sure.

Chris: Because I think sound is one of the biggest issues that we come across as well, especially when people are really interested in polished concrete flooring and resilient surfaces or porcelain tiles. Echo in an office, especially in an office where there’s salespeople who are on the phone all day, can become pretty distracting. And I think understanding your own business and understanding your own space and working with design people, right? Like our firm, we think a lot about all the surfaces and what are the acoustical properties of those surfaces, and how do we make sure that when you finally move in, it’s not an echo chamber, right? And so we spend a lot of time asking questions about how are you going to be using the spaces, who are the people that are going to be in the spaces, and really thinking about that noise factor, because that’s a big one.

Doug: Yeah. Just based upon historical observations and job functions, people are, in whatever industry they’re in, if they’re looking at computer screens most of the time and they’re not necessarily on the phone, that’s one thing. If they’re a sales-driven group and they have a lot of people on the phone, you really have to be planning for that, and also hopefully have considerate people that think about others in the office.

Chris: We have another question on how early should you bring in a construction team? It’s hard to pick somebody before you even have a lease signed. So sometimes having a contractor, if all they do is just the fit-out, may not be the right fit. Having an interior designer or an architect or a design-builder, I think, you can often bring them in very early on in the process, even going through that second visit. When we did our project together, right, we went through all the spaces in a day. It was a brutal long day.

Doug: Yeah.

Chris: But then we created a short list, two or three spaces, and went back and went again. And I think many firms, and again maybe there’s a nominal fee for this, will come with you and will visit the spaces and kind of be that adviser. So really, it can be very early in the process.

Doug: Yeah, and I would also advise to have more than one representative from a company go on a space tour, because you’re generally looking at multiple properties, and if you’re doing it in whether it’s one day or several days, you need to take pictures, take notes, and…

Chris: This is the tenant themselves.

Doug: The tenants themselves, and totally. So you can differentiate one from the other, because they can kind of blend together.

Chris: Yeah. You need to divide and conquer. One person is the eyes, one person is the recorder, right?

Doug: Yeah. Having two or three people, honestly, is not a bad strategy.

Chris: Sure. Just to have a good productive day. All right. Well, that’s the time we have. Thanks, everybody, for taking some time. Doug, this was fun. Let’s do this again.

Doug: Absolutely. Enjoyed it, and we’re glad to have you all on this presentation.

Chris: Thanks, everybody.

Doug: Have a great day.