What do NNN, FS, FSEJ, and MG stand for?
These acronyms refer to the way that building operating expenses are paid for. The components that make up operating expenses include property taxes, common area maintenance, property insurance, utilities and janitorial service.
The most common types of leases are:
NNN (triple net) – the tenant pays for all of the operating expenses in addition to the rent
FS (full service) – the landlord pays for all of the operating expenses, which are included in the rent. Phone and internet are paid by Tenant.
FSEJ (full service excluding janitorial) – the landlord pays for all of the operating expenses, except for janitorial service, phone, and internet.
MG (modified gross) – the landlord pays for all of the operating expenses except utilities, janitorial, phone and internet.
Move Your Office can help you analyze each prospective property to determine the actual cost of occupancy, based on how the operating expenses are handled.
Why does my company need a tenant representative?
Landlords and their representatives negotiate leases on a daily basis, while the typical business tenant does so once every three to five years, if ever. Given those odds, who do you think will come out ahead at the bargaining table?
Engaging a tenant representative ensures that your company’s interests are protected and that you find the best location at the best terms. A tenant representative will not only level the playing field, he or she can even create competition among landlords to win your business.
What about cost: how are tenant representatives compensated?
Your tenant representative’s commission is typically paid by the landlord. Just as the seller pays the realtor commission in residential real estate, the landlord pays the commission in commercial real estate.
If you work exclusively with your landlord’s representative, that individual earns the entire commission. However, if you engage a tenant representative to look out for your interests, he or she will split the commission with the landlord’s representative when the lease is signed.
How does tenant representation work?
Working with a commercial real estate broker as your representative means that your best interests are driving every step, from the facility search to lease negotiation. It also means you and your staff can focus on running and growing the business while your tenant representative handles the relocation research and legwork.
How does my tenant representative discover the best properties?
Your tenant representative will scour the market to turn up any and all properties that meet your requirements, regardless of which brokerage firm has the property listed. In contrast, the landlord’s representative is obligated to promote their clients’ buildings.
Your tenant representative will also know about unadvertised opportunities and creative alternatives that would not occur to someone unfamiliar with the market.
How can my company be sure we’re not overpaying for office space?
Working with a tenant representative is the best way to make sure you’re getting the most competitive lease terms available in your market. For example, part of a tenant representative’s strategy will be to create a bidding war between two or more landlords by sending out a well-crafted Request for Proposal (RFP) to each one. Even if you’re really only interested in one property, your representative will choose one or two similar properties to negotiate against, thus encouraging landlords to compete for your tenancy.
Can a tenant representative help with renewals as well as new leases?
Absolutely. Tenant representatives frequently negotiate renewals on their clients’ behalf. In addition to analyzing the renewal terms, your representative will also show you what else is available on the market to ensure that you’re still getting the best available terms.
Why tenant representation is crucial to getting the best lease possible
Driving around town, anywhere you find vacant office, industrial or retail space you’ll also find a sign emblazoned with the company and contact information for one real estate broker or another. These brokers represent building owners, but there’s another type of commercial real estate broker – one that provides tenant representation.
A tenant representative caters to the businesses looking for a place to set up shop. It’s a specialization many tenants appreciate when approaching a lease negotiation. Landlords and their representatives usually bring one distinct advantage to the table: They negotiate leases on a daily basis, while the typical tenant only enters into a lease once every three to five years. Because tenants negotiate leases so infrequently, they’re not as practiced with the strategies that lead to the best outcomes for their needs.
A commercial real estate broker experienced in tenant representation can level that playing field for you with their focused history in negotiating for tenants. Not only that, these representatives know how to comfortably guide you through the whole process of finding and securing a new space or new lease – a prospect that can seem daunting to the average tenant.
The key to successful tenant representation is knowledge. Your broker should know your business goals and thoroughly understand the ins and outs of the local commercial real estate market.
A tenant representative will:
- Assist you in developing a strategic real estate plan that is consistent with your larger business vision.
- Help you determine your particular office space needs, including the type and size of your space.
- Analyze the market and identify potential properties that meet your specific criteria.
- Provide a comparative property and financial analysis to narrow the list of alternatives.
- Work with the landlord to maximize the tenant improvement allowance available to design or reconfigure the space.
- Negotiate as much flexibility in lease terms as possible.
To find a good tenant representative, interview several brokers and ask the following questions:
- Do you specialize in a particular property type?
- How long have you been working in commercial real estate?
- Have you worked with other companies like ours?
- Do you have more experience in certain parts of town?
- How do you find available space?
- Can you provide references for recent lease transactions?
Also ask about their education and credentials. Hiring a broker with the CCIM (Certified Commercial Investment Member) designation will ensure you are getting an experienced tenant representation professional with a proven track record.
Many tenants don’t realize that a tenant representative can also represent clients when it comes to lease renewals. Having tenant representation on your side of the negotiating table will help ensure that your renewal terms are in line with the market and that you are receiving competitive concessions that many renewing tenants don’t realize are available.
In larger markets, the majority of tenants utilize the service of a tenant representative in their initial search for commercial space and a significant number also use them to negotiate lease renewals.
So next time you find yourself looking for either new space or a lease renewal on your current space, consider having tenant representation on your side. Engaging a tenant specialist ensures that your company’s interests are protected and that you find the right location at competitive terms.
Negotiate with your landlord before signing an office lease renewal contract
It is always beneficial to stimulate competition by negotiating simultaneously with more than one landlord; in the case of an office lease renewal, it is imperative. Were you to negotiate solely with your present landlord, you could create a perception that you are a captive tenant; when you no longer have sufficient time remaining on your lease to preserve the option of relocating, this perception would become a reality – you would in fact become a captive tenant, and your negotiating leverage would diminish accordingly.
Why Your Landlord has an Advantage
Your landlord knows it is more expensive for you to move than to renew (moving and cabling costs, disruption to your business, etc.). Even with competition from other buildings, your landlord is likely to presume a competitive advantage. Landlords nearly always start a renewal negotiation with an over-market proposed rent, and then reduce the rate as slowly as necessary to renew the tenant at the highest possible rate.
Furthermore, lease renewal clauses often contain two points, which help landlords maintain higher rents:
- Options to renew usually must be exercised prior to the determination of rental rate – you might have to commit to the new term before knowing how much the obligation will cost, and without knowing how this cost compares with other buildings.
- Renewal clauses often contain a provision that prevents the renewal rent from declining below the rate paid prior to renewal. In many cases, rents are lower today than rents negotiated 5 years ago; this type of clause would prevent you from benefiting from today’s lower rents.
- The inherent advantages enjoyed by a landlord in a renewal negotiation are neutralized if you negotiate simultaneously with all prospective landlords, including your present one, in advance of the date by which you must exercise your option to renew. You should know the rental rates of all competing buildings before committing, and thus make an informed decision.
Negotiating simultaneously with all prospective landlords, including your present one, will generate one of two possible results. You will either:
- Obtain a competitive renewal that reflects currently favorable market conditions; or
- Uncover an alternative so compelling that you relocate
The additional costs of relocating can be added as a line item to the financial analysis of all buildings except your present location, to enable you to evaluate the economics of relocating versus renewing.
Renewing a Lease Can Provide Significant Cost-Savings for Landlords
Your landlord will realize significant cost savings if you renew in the following ways:
Tenant Improvements – While you may require some refurbishment, your tenant improvements are likely to cost a fraction of those a new tenant would require. Renewing a tenant can save a landlord thousands of dollars which would otherwise have to be spent to acquire and accommodate a new tenant.
Downtime – Downtime consists of two components; the time when the space is vacant, plus any initial free rent negotiated with the new tenant. If your departure causes six months of downtime, those six months of lost rent are equivalent to 10% of the value of a five-year lease.
Remember, it is much cheaper for your landlord to keep you than to lose you. You have leverage in a renewal, make sure you use it.
Once a year, typically during the 1st quarter, tenants with full-service commercial real estate leases that include pass-through expenses will receive an Operating Expense statement from their landlord.
The operating expense statement will reflect the tenant’s obligation to pay its share of increases in the operational costs of the building.
Here’s a basic explanation of operating expenses and how they affect tenants. The vast majority of multi-tenanted office buildings are leased on a full-service basis. Full-service means that all of the expenses associated with operating a building are included in the rental rate.
These expenses include:
- Property Taxes
- Building Maintenance
- Property Repairs
- Janitorial Service
A tenant engaged in commercial real estate leasing can expect that every cost associated with their lease will be taken care of, even down to a burned-out light bulb. You can imagine that over the course of a long-term lease, increases in building operating expenses, due to inflation, will eat away at the building owner’s profit margin.
In order for landlord’s to keep their rental income somewhat steady, the base year method has gained popularity and appears in most full-service commercial leases. The base year concept is fairly simple – the first year a tenant occupies their space is usually set as the base year. Until December 31 of your base year, all of the expenses associated with your lease will be fully covered by the landlord. A dollar figure will be calculated reflecting the precise cost per square foot of the building expenses.
So what happens during your second year of occupancy in a building? Your rent will still cover the building expenses that actually occurred during your base year, but any increases in building expenses will be passed through to you in the form of a separate bill. The landlord, or their property management company, will send you a reconciliation statement showing the total of the additional charges.
Tenants are often concerned about whether increases have been properly calculated and whether some costs have been improperly included. At the very minimum, you should refer to your commercial real estate lease and compare the cost items in the reconciliation statement with the language of the operating escalation clause contained in your lease. During the lease negotiation process, many tenants go to great lengths to insure that items included as building operating expenses are typical for the type of building and that they are applied fairly among the tenant base.
Don’t lose this advantage by neglecting to verify the base year reconciliation report against the terms of your lease.
How is office space rent calculated?
Rents for office space are typically quoted per square foot, on an annual or monthly basis. In other words, a quoted rent of $18.00/SF annually means the rent paid will be $18.00 per year per square foot.
To calculate annual and monthly rent figures just take the size of the space (in square feet) and multiply by the rate. This will give you the annual rent; divide this number by 12 for the monthly rent.
For example, 2,000 SF at $18.00/SF is calculated like this:
2,000 x $18.00 = $36,000 annually
$36,000 / 12 = $3,000 monthly