Guide: Tips to lease the right office space in the U.S.
Do your homework prior to leasing
Leasing office space in the US can be challenging. Indeed, the commercial real estate market in and around major U.S. cities and technology hubs is very competitive, and occupancy is at an all-time high. For example, in greater Boston, where Axelia Partners’ head office is located, vacancies are at 1.5%, giving landlords almost total control over the terms of a commercial lease and tenants little leverage. Foreign companies expanding in the U.S. need to do their homework prior to leasing to get the best deal possible. Here are a few tips to get you prepared.
Figure out what your business needs
Involve your key stakeholders in the process as early as possible. They will assist you in determining space needed, location, length of term, budget, amenities, possible permitting and
- Business people: They will be able to identify where you are in your business cycle -early, expanding, etc.
- HR team: They will know the personnel needs of the company.
- Board of directors: They might need to approve your lease before you sign it.
- Legal counsel: He/she will ensure a smooth negotiation of the lease agreement when the time comes, and should be involved as soon as the basic terms (i.e., amount of space, length of term and rent) are agreed upon.
If you need specialty facilities, such as a lab, you will want to find a good project manager and an architect.
Identify the lease option that best suits your business
- Direct lease: This is often the best solution for a business that is somewhat established. Lease terms are generally from 3-10 years, and landlords may participate in making improvements to the premises.
- Sublease: This will generally have a shorter lease term, but can be more complicated because there are more parties involved.
Pay attention to key issues in the classic direct lease
Commercial office leases can run numerous pages. Getting a U.S. legal counsel involved at the letter of intent stage will help you to identify key terms, thus making negotiations easier. Below are several key terms to consider when you are leasing office space in the US.
- Gross rent: This is the standard in classic office leases. The tenant only pays the gross rent and no other expenses. Gross rents will increase by a certain percentage or amount every year. They tend to be higher than net rent.
- Net rent: This is the typical rent in specialty leases (i.e., for labs or industrial use), but is becoming more common in classic office leases. Net rent includes a base rent plus a pro rata share of common expenses (i.e., taxes, maintenance, utilities, and other operating expenses). It is important for the tenant to have audit rights to review the common expenses.
- Security deposit or letter of credit: It is now common for landlords to ask tenants for a letter of credit rather than a security deposit; this protects the landlord if the tenant does not pay rent or goes bankrupt. For a security deposit, the tenant can ask for a burn-down provision, whereby the landlord allows the tenant to reduce the amount of the deposit over time.
- Expansion or extension options: If your business is growing, you may try to negotiate expansion (more adjacent space) or extension (longer lease) options into the lease. If you are not sure where your business is heading, you may want to have the option for early termination or right to sublet in the case where the business is sold or downsized.
- Space improvements: See to what extent the landlord will participate in paying for improvements to the space; this is more common in non-office space and longer-term leases. Be sure that the landlord does not create too many barriers to approving tenant improvements.
- Common area usage: Make sure you understand the logistics of using common areas (parking, roof deck, shared conference rooms, kitchen, etc.) and what signage you can use (outside building, in lobby, etc.)
- Maintenance: Understand how maintenance is shared on the premises. Identify what happens in case there is an interruption in service on the premises (i.e., rent abatement). Insurance: Be sure you have the insurance required by the lease, or renegotiate those terms.
As a company expanding in the U.S., and a potential tenant, you do not have a lot of leverage in the current commercial real estate market. Careful planning, however, can help you to maximize your prospects of finding the space that best fits your company’s needs. While you may find the right space on your own and negotiate directly with the landlord, Axelia Partners can assist your organization in identifying a commercial broker and a real estate attorney. Contact us before leasing office space in the US.