Do you remember being 16 or 17 years old and living with your mommy and daddy? Every time you wanted to do something, your mom and dad rightly said, “We pay the rent here. You do what we tell you.” When you turned 18 you got your own apartment. You had privacy and freedom, it felt good. The same goes for you as an entrepreneur. When you finally go and sign your own office lease, you feel free. Since it’s your business and your place of operation, you get to do what you want with your business.
My goal for this video and article is to equip and educate you about signing an office lease. I want you to know exactly from A to Z what you need to know as a tenant. I want you to understand the broker’s, landlord’s and everyone’s motivation so that you won’t get ripped off.
This episode is for three different types of people:
• You don’t yet know if you’re going to have an office. You’re an entrepreneur, and you just want to get educated about office leases.
• You’re about to sign your first office lease, and you don’t know what you’re doing.
• You already have your own office lease, but you want to know what you did right or wrong so the next time you don’t make the same mistakes.
Everything that I talk about in this video is from the many mistakes I’ve made, and the many leases I’ve signed. I based this video and article on my experience as I’ve signed millions and millions of dollars of leases over my career.
So let’s get right into it.
What to Keep in Mind as You’re about to Sign an Office Lease
#1: How Much Space Do You Need? – 1:41
First, how much space do you realistically need? When you think about how much space you need, don’t think about just how much space you need today. If you’re going to sign a 36-month lease, ask yourself how much space you need 12-18 months from now. You need a bit of room to grow so you don’t outgrow your office, but you don’t want it to be way too small.
#2: Location – 2:08
Number two, location. Where do you want it to be? Does it have to be near a freeway? Do you want it to be in a place where all the traffic comes? Do you want it to be in a shopping center where it’s right by the mall or in a mall? Where do you want it to be? Where’s it suitable for you as a location.
#3: Affordability – 2:23
Third, affordability. What can you afford? Look at how much money you have set aside. Do you have enough to cover all your expenses for six to 12 months? They’ll ask for the first and last month’s rent. Sometimes they ask for your first, second, and last month’s rent. It depends on if you have experience and how you negotiate.
By the way, no two deals in commercial real estate are ever the same. Keep in mind that it’s all negotiable.
#4: Term – 3:01
Fourth, what’s your term? Is it 12, 24, or 36 months?
#5: Parking 3:07
Fifth, do you need parking? Will you have a lot of employees that need to park their cars? Do you want a place where parking costs $1.20 per hour? Do you need security? What are you looking for with parking?
#6: Foot Traffic – 3:21
Next, will you have a lot of foot traffic? Is your office a place where a lot of customers come in? If so, you need nice office space. If not, who cares, if no one’s going to see it. For instance, if you have a call center, there won’t be any customers that come there to buy from you. You need to know this because it makes a big difference in the price point that you get to save.
#7: Legal – 3:38
Last but not least, legal. Even if your commercial real estate agent or broker says, “I’m going to have my legal look at it,” whatever you do, have your own attorney look at it. I recommend that you spend $200 – $400 on another attorney that’s not emotionally attached to the broker. The broker’s attorney looks more at what benefits the broker. So get a non-interested attorney to look at the entire deal before you do anything.
3 Types of Office Space – 4:06
There are three types of commercial office space, Type A, Type B, and Type C. Type A is the newest building. It was built in 2009, in the most trafficked place, in a good community. Type B may be a little older, such as built in 1981 but is in a decent community. It’s still presentable, and you can have clients come in, but it’s not the sexiest. Then there’s Type C. Type C is the oldest in the worst location. It’s not a desirable place.
By the way, I’ve had all three types of office space, and know exactly the pros and cons of each.
Rent – 4:54
Now, let’s talk about rent. When it comes to office lease rent, you hear terms like single net, double net, triple net and full-service gross. If you’re confused when commercial real estate agents use these terms, this point will clear that up for you.
Here are a couple of things to keep in mind. First, you rarely see single net. Single net is when the landlord pays the entire rent, including expenses. For instance, if you have taxes, insurance, and maintenance, they cover all that. You don’t pay any of it. It’s all on them. You don’t find that a lot, at least not in America.
Double net is where you only pay taxes and insurance, and triple net is when you pay taxes, insurance, and maintenance.
Then you have full service gross, where you write one check and it covers everything.
I’ve done all of these myself. Typically, commercial office lease is double or triple net.
Credit – 5:51
I’ll never forget the first office lease I signed. I rented from other people. It was a horrible place for me because I couldn’t grow. I had no control, had no authority to say anything about the office I had, and it drove me insane. If I wanted to do something with the office, they said, “No, it’s not your office.” It was like living with my mommy and daddy.
Listen in here to find out what I did about it.
Motivation – 8:01
It’s important to know your motivation the broker’s motivation, and the building owner’s motivation. It’s vital that you understand that part and what relationship you play.
Your Motivation – 8:23
First, what is your motivation? Your motivation is to get exactly the amount of space you need, with the exact floor plan, the way you want it done. You’ll hear the term, TI, which means tenant improvement. You want them to set up the office in the way you want it, without extending the lease too far.
The Broker and Owner – 9:01
Now let me tell you about the broker. Here’s how a broker’s commission works. The longer the lease, the bigger the space, the higher dollar per square foot, the bigger their payday.
Let me simplify the math for you. Let’s just say the space you get is $3,000 a month. And you sign a 36-month lease. $3000 x 36 is $108,000. The commission typically is 6%. Six percent on the $108,000 is $6,480. Let me tell you how this $6,480 gets split and who pays for it.
Half of it goes to your real estate agent. You don’t pay for it; the building owner pays for it. The other half goes to the broker that represents the building owner. So $3,200 goes to your broker, $3,200 gets to the building owner’s broker, all paid for by the building owner.
Now if you’re on the complete opposite side and you sublease your space to somebody else, you pay the $6,480 to the two because you become the lease owner. So keep that part in mind.
Broker Relationship – 10:34
Now, let’s talk about the broker relationship. I’ve had many different brokers in my career, and they’re pretty interesting.
One personality I had, let’s call this guy Hal Cook. I would call this guy probably the sleaziest commercial real estate agent I’ve ever dealt with in my life. Let me tell you what happened with this guy. You can listen to the whole story here.
Based on my experience, my suggestion is, don’t get a broker not tied to a bigger company. It’s much better to hire somebody that’s tied to CB Richard Ellis, a huge company. If you do that, and your real estate agent ends up quitting the industry, you can always go to CB Richard Ellis and say, “I need your attorneys to look at this and help bail me out.” Because the guy I dealt with was a nobody, a one-man shop, I got stuck with the lease. So I ended up paying for the $1.5 million to $2 million lease.
Now let me tell you about another guy I had named Jared. He’s an absolute stud but made one mistake. He said he knows the Glendale market very well, and he didn’t. So you need to know what city your broker has experience with. Listen. Brokers are salespeople. They’ll tell you they know everything about the market. They do not. Everybody has a specialty. So ask them, “What is your specialty? What market, city, zip code?” Let them tell you. If they tell you everywhere, don’t believe it. It’s a lie. Ask them for specific zip codes that they work very well. Find commercial real estate agents that are dominant in the specific zip code where you want office space. I like Jared. He was a hustler. He worked hard and was all good. But out of the five to ten leases I gave him, he took one bad lease.
Building Owner’s Broker and Your Broker – 14:10
Now let me give you another relationship about brokers you have to know. I know this is going to sound strange, but the building owner’s broker and your broker are on the same damn team. You know why? What do you think they both want to happen? They both want to close the deal. And how big of a lease do you think both of them want to happen? As big of a lease as possible, which makes both of them more commission. So the building’s broker and your broker are on the same team. There’s nothing wrong with this, but don’t be naïve and think your own broker is fully on your side. Both brokers want a longer lease to make more money.
Building Owner – 15:27
So now let’s get to the building owner. The building owner tries to keep the property because they build equity. Every year somebody else pays the rent for the building they own, they build more equity. Long term, they build a bigger portfolio. The more income comes in, the more properties they leverage, the more assets they can leverage. They’re simply running the capitalistic system. They do their part. They have no involvement except to make sure that 100% of the office space is rented out.
An office building that’s above 90% doesn’t need you that bad, but an office space that’s less than 70% needs you tremendously. So it’s always good to ask about the current occupancy percentage. If they say, “Around 70%,” it’s on your side. If they say, “Oh, we’re at 92%,” it’s on their side. So if you want to be in that building, you have to pay a premium. So ask for the current occupancy rate in the building, and they’ll tell you.
Now another thing you need to know is when you’re dealing with building owners, if the company that manages the building is public, they’re cutthroat.
So I’ve worked directly with building owners. I’ve worked with bigger building owners where I only dealt with the broker. But regardless, you want to know what’s going on. For example, Douglas Emmett is cutthroat. There’s no wiggle room. Customer service doesn’t matter as much because they answer to shareholders. Especially right before the quarter, they don’t want to show a loss. If they’re private, they are typically a little more understanding. So I prefer to go into privately held building spaces.
My Recent Experience with Negotiating an Office Lease – 17:29
Listen in here for my recent experience negotiating an office lease, along with a creative solution I came up with that benefited both the building owner and me.
I shared all these points with you because when you’re educated, people can’t bully you and take more money from you. You’ll get the exact office lease you’re looking for when you solve for x.
With that being said, share any questions, comments, or office lease stories of your own in the comments below. And if you haven’t already subscribed to my YouTube channel, click on the button below to subscribe.