• Class C buildings are typically 15 to 25 years old but are maintaining steady occupancy.3
BUDGET.
The other major preliminary consideration that the firm should
assess upfront is its budgetary restrictions with respect to rent, finish-out, and furnishings. As discussed more fully later, rent is typically calculated based on a per square foot basis; however, there are a number of additional expenses that, as a tenant, the firm should expect to be responsible for paying on a monthly basis. Moreover, the firm should anticipate being responsible for substantial upfront costs, such as a security deposit, and depending on the condition of the potential office space, the firm may also have to pay for all or a portion of the improvements and furniture necessary to bring the office space into satisfactory condition.
Accordingly, the firm should prepare a preliminary budget that sets forth an acceptable expense range for both the recurring monthly costs associated with a lease (rent plus expenses) and upfront costs that the firm might be expected to pay (security deposit, finish-out, furniture). As with any start-up,
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cash f low in the first few months and years of the life of the firm is critical; thus the firm should have a basic understanding of its budgetary constraints before it begins to search for office space.
SUBLEASING.
Subleasing office space is often an attractive option for
many professional services firms that are just getting started. Most landlords require future tenants to post a significant security deposit on a lease, particularly for new, start-up firms or companies without a proven track record.
By subletting office space, the firm can avoid all or a portion of the financial burden associated with such a security deposit, because the sublessor is still contractually liable to the landlord for all rent due and owing under the primary lease. Thus, while the firm may be required to post a security deposit with the sublessor, the amount of such a security deposit may be significantly less than under a traditional lease.
Not only might the firm be able to obtain significant savings by avoiding or at least decreasing the amount of security required on a sublease, but it might also realize additional savings in rent by considering a sublease.
Whether the potential sublessor has already moved out of the office space or is simply trying to sublease a portion of its current office space, one of the sublessor ’s primary objectives in subleasing office space is to offset the amount of rents due under the primary lease. Thus, for example, if the sublessor is contractually obligated to pay the landlord rent at $25 per square foot, the sublessee might be able to negotiate a sublease that calls for rent to be paid at $20 per square foot. In such a case, the sublessor will have offset the amount it is liable to the landlord by 80 percent. While the amount of rent savings that might be achieved depends in large part on the strength of the overall commercial real estate market in the area, the sublessor rarely expects to find a sublessee who is willing to pay the same rent as the sublessor is required to pay under the primary lease.
An additional area of potential cost savings that the firm can obtain by opting for a sublease relates to the design and finish-out of the office space.
In many cases, office space that is being marketed as a potential sublease will have already been designed and finished out by the sublessor. In offering to sublease all or a portion of its leased space, the sublandlord rarely, if ever, tries to recoup from the sublessee the money it spent in initially designing and finishing out the office space, which can be costly. Although the overall design of the office, the size of the offices within the space, and the finish-out (e.g., carpeting, wall covering) may not be exactly how the firm would have designed the office space on its own, the firm must balance this concern with the savings in avoiding paying for the office design and finish-out. Under a traditional lease, landlords often provide the tenant with a finish-out “allowance,” which is a negotiated amount that may or may not be sufficient to design and finish out the office space to the tenant’s satisfaction.
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Last, the sublessor may allow a sublessee to use some or all of the furniture and equipment currently in the office space at little or no cost to the sublessee. As discussed more fully later, furniture, fixtures, and equipment can account for a large portion of the start-up costs of any business, including the professional services firm. However, as with office design and finish-out, the sublessor will have already incurred the cost of furnishing and equipping the office space that it intends to sublease and, as a result, may be willing to allow the sublessee to use its furniture and equipment during the term of the sublease. The cost of using the furniture and equipment presently in the office space can simply be rolled into the amount per square foot that the sublessee agrees to pay under the sublease. Alternatively, the sublessee can offer to purchase all or a portion of the sublessor ’s furniture, which, as discussed more fully later, would still save the firm significant money over buying new furniture and paying for delivery. The subject of furniture and equipment is one of many potential points of negotiation between the sublessor and sublessee and may not even be an option if the sublessor is moving its entire business operation to another location. Nonetheless, in negotiating a sublease, the firm should consider these options.
Subleasing office space can be accomplished in different ways. The sublessee can assume a portion of an existing lease and share common areas and facilities with the primary tenant. On the one hand, such an alternative provides the firm with an opportunity to get to know the primary tenant and possibly obtain business and business referrals from the primary tenant. On the other hand, if the primary tenant is a competitor of the sublessee or there are other compatibility problems that cannot be resolved, sharing common space with the primary tenant may not make sense. One way to assume only a portion of the existing lease and avoid or minimize sharing common areas with the primary tenant is to construct a wall dividing the sublessor’s office space from the sublessee and construct a separate entrance. Such construction adds to the upfront costs associated with the sublease, and the sublessee and sublessor must determine who will pay for the construction. How much these considerations impact the agreement will depend on the individual firms need for privacy, security and a separate identity within the office space.
An alternative to assuming only a portion of an existing lease is to take over the entire lease. This type of situation often arises when the sublessor already has or is considering relocating its entire office to another location.
In sum, there are various ways in which the professional services firm can go about subleasing office space. Subleasing office space provides the firm with an opportunity to save significant upfront capital on a variety of fronts, including security deposits, rent, finish-out, and furniture. On the negative side, however, subleases are often shorter in term than regular leases, and the sublessee may be forced to cooperate and coordinate with the sublessor on common areas, reception management, signage in the space, security and privacy issues.
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Leasing Agents
Once the firm has established its basic needs and requirements, it should consider retaining a leasing agent. There are numerous benefits to retaining a leasing agent. First, leasing agents usually possess a greater degree of familiarity with the landlords and properties in the area and the real estate agents representing such landlords. The real estate community in many cities is close knit, and leasing agents can provide the professional services firm with their valuable impressions about the quality and reputation of the landlords who are offering office space, as well as the history and quality of the properties in question.
Second, leasing agents almost certainly possess greater knowledge of the commercial office space that is available than the professional services firm.
Commercial leasing agents are in the business of familiarizing themselves with many, if not all, of the various office buildings in a particular city. Thus, while the professional services firm might possess a limited amount of knowledge about certain office buildings in town, leasing agents should bring to the table deeper historical insights about many office buildings.
Third, leasing agents can provide valuable counseling and insight into various office needs and requirements that the professional services firm may have overlooked. Leasing agents are not only professionals who help the professional services firm navigate the office search and lease negotiation process but also counselors who will have a great deal of experience in working with tenants and understanding their needs. The professional services firm should take the time to explain the firm’s business model and goals to the leasing agent, who can then provide the firm with informed advice about the best leasing alternatives.