How to Avoid Being Ripped Off When You Lease Office Space, Part I
A commercial office space lease is a complicated legal document and is usually your startup company’s first big contract. A real estate broker is a great resource to find available office space and determine the market rents. However, your lease’s location and rent provisions account for about only 10% of the language in a commercial office space lease. The other 90% is not boilerplate language you can simply shrug off. Most of it will undoubtedly contain provisions that
can will have financial ramifications for your company.
Why would your real estate broker avoid this other 90%? You have to understand how the commercial real estate game works. The owner of the building hires a real estate broker (“landlord’s rep”) to lease out the office space. When a space is rented, the landlord’s rep receives a fee equal to 6% of the total rent due under the lease. However, if the tenant hired his or her own real estate broker (“tenant’s rep”) this 6% fee is split between them both. Four main points should stick out:
1. The landlord’s rep does not want you to be represented by a real estate broker. If you call the landlord’s rep directly, not only does he or she believe they can take you for more under the lease–he or she will get paid DOUBLE for doing so.
2. The building owner is paying a 6% commission no matter what. You aren’t saving the landlord any money if you don’t hire a tenant rep, so don’t think going solo provides more room to negotiate.
3. Your tenant rep gets paid by the landlord, not you. The great part about tenant rep’s is that they don’t charge you. Thus, you should hire a tenant rep because you will get knowledge about the commercial real estate market without getting a bill.
4. Both the landlord’s rep and your tenant rep get paid only when you sign the lease. This last point is the main reason why real estate broker’s (tenant reps) are so reluctant to negotiate the other 90% of the commercial office space lease. The more you push back on the landlord, the more likely a deal will not be made. They do not want to spend an extra week or two with you to find new space. Your commercial rep would rather you not hire an attorney for the other 90% and just blindly accept it.
Tenant reps do not like working with attorneys and typically refer to us as “deal killers” (although they really mean “commission killers”). Whenever I work with a client on a deal, whether a real estate lease or company acquisition, my only concern is to get it done on favorable terms that protect my client. If I advise my client not to sign an agreement because of a particular provision, I’m not trying to kill the deal. It’s just simply a deal that my client should not enter into.
Thus, if you want the best office space deal possible and avoid being ripped off when you lease office space, you have to hire BOTH a tenant rep and an attorney. That is Step 1.
Part II of this series will focus on the commercial office space provisions that make up the other 90%, why it matters, and what to consider when you negotiate.