Guide to leasing office space

Everything tenants need to know about negotiating lease agreements

By
Western Investor
June 23, 2017





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Office buildings in major Canadian cities are usually owned or managed by large sophisticated private entities or institutional groups such as real estate investment trusts, insurance companies, or pension funds. During a lease transaction, the landlord’s goal is always to maximize shareholder return.

To do this, a prudent landlord will arm himself with the tools required by way of expert representation and extensive market research.

The obvious question – if a professional landlord is taking these necessary steps, why wouldn’t a tenant do the same?

And, first, it is not all about location and size. But it should be about having a tenant representative to support you.

With the amount of information offered online through a multitude of websites, it is fairly easy to prepare a list of potential locations. But exploring the market with the sole parameters being size and location rarely renders the optimum locations. Two of the most common considerations which are often overlooked are ownership structure and the building’s tenant profile.

The modern landlord community consists of many different ownership types. What type of ownership is the right fit for you, the tenant? Let’s explore a hypothetical scenario: you identify an opportunity in an office building, owned by a local investor with few commercial holdings. Although this particular landlord is one of the most diligent and reasonable landlords in the market,  it doesn’t necessarily mean that he will be the best fit for you.

In order to make these premises work for your organization, extensive improvements and customizations must be made within the interior of the space at a considerable cost. It is often the case that this type of landlord will be reluctant to contribute financially to a tenant’s specific build out, as opposed to a larger or institutional landlord. It is not necessarily the case of the landlord being unreasonable – they simply may not have the access to capital. Should you wish to have a significant portion of your office improvements financed by a tenant improvement allowance, you may need to focus on an alternative building where the overall deal structure will be a better fit for your specific situation.

Flexibility is arguably the most important factor when considering a long term lease commitment. Growth and contraction plans are typically at the forefront of most progressive organizations’ business planning. At face value, one would think that the larger the building or complex, the greater level of scalability which offers the required flexibility. But often, it soon becomes clear that this is not the case.

The tenant profile within a building will dictate the flexibility of an incoming tenant’s tenancy. Many assume that a large building will automatically accommodate expansion plans due to the size and many moving parts. Often overlooked are the many pre-negotiated “rights” that are likely scattered throughout the building by a number of existing tenants. These rights can dramatically change the landscape of the perceived future flexibility for the incoming tenant. You may have the ability to negotiate terms on future expansion plans but, more importantly, where in the lineup are you? In essence, comprehensive due diligence on the existing rights of all tenants within a building is essential, but often overlooked. Whether overlooked or not fully understood, the effects can be severe.

Looking at the tenant representation service on the surface, it is a three-step process in the order of strategy development, site identification and lease negotiations. A comprehensive service requires detailed analysis of each of these steps.

 

Next: Selling a business with real estate
Previous: Investing in office space 


Pigott is vice-president, office leasing, with Avison Young, Vancouver.

Phone: 604-757-4959

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