1. What is the credit of the company I am signing a lease with?
   Most landlords have loans in place and at times a lender will ask to approve a lease before it is signed as they technically are part owners. If a landlord wants to refinance a building, a large part of the valuation of the building will depend on the buildings rental stream and likelihood of this rental stream continuing (ie your financial picture and credit history). Some landlords will not be comfortable leasing spaces to start up companies because of this credit risk.
2. How much do I have to spend to get them to start paying rent?
   The issue here is concessions that a landlord gives to a tenant. These included custom tenant improvement build outs, free rent, and commissions paid to brokers involved in the transaction. The more a landlord must pay to start your rental stream, the more scrutiny they will use in analyzing your company as a potential tenant.
3. What security do I have if this company defaults?
   Most likely the security that a landlord has the most access to is your security deposit. Theoretically they can get in the line and be one of the debtors attempting to collect some of your business during its liquidation, but this time investment is rarely made by a landlord. If you are unlucky enough to personally guarantee the lease, the landlord might pursue you personally to cover the remaining lease obligation or at least the marketing time and cost for procuring a new tenant.
4. How long do I have to wait for another tenant to come along?
   During the negotiation process or when you are potentially behind on your rent, the landlord will consider this argument. If the market is doing well and there is lots of demand for space, your ability to negotiate will be decreased because the landlord will have a rough idea of how long it will take to find a higher quality tenant. If the market is weak (like right now), the tenant will have a lot more leeway to negotiate and can use this argument as part of the negotiation process.
5. What is their use and how will that affect the building?
   If a company is cramming 15 people into 1,000 square feet, these people are having an adverse effect on the buildings systems and building community. For example, a school that leases space will have a few hundred students using the lobby, parking lots, and bathrooms when a normal office user might have 30 full time users affecting the building. A landlord will think carefully about your use, your clientele, the type of consumer who comes to visit and how that will affect other tenants in the building and the buildings value.

Last year, Rofo helped Causes sublease some extra office space and they were kind enough to sit down and talk with us about the process.  Due to the economic situation, many other companies are finding themselves in a similar situation with some extra office space, so it’s great to have such timely insight into subleasing.  Thanks again to Sydney from Causes for sitting down with us.  Check them out at Causes.com and at Facebook.com/Causes.

Causes, founded, by Joe Green and Sean Parker (founder of Napster), grew out of the “belief that in a healthy society, anyone can participate in change by informing and inspiring others.” Causes helps non-profits and other charitable organizations harness the connectedness of social networks to raise awareness and funds for their “Cause”.   With Causes anyone can create a “Cause” and then build up the group around it by interacting with members and the community.  They have about 25 million active users on Facebook, pretty impressive.

Besides claiming that you are a young, growing, and cash strapped business that the landlord should help out of the goodness of his heart, I always found a few methods helpful.

1. The first one was to discuss the other spaces you are looking at using the real financial terms with the broker and or the landlord. Once they realize you might go elsewhere, they usually will attempt to cut to the chase and put their best foot forward.
2. The next technique is to attempt to phase your growth into the space. For example if the space is 2,500 square feet, you begin with the justification that you need 1,500 square feet now, but will need the 2,500 square feet a year from now. If you are signing a 3-5 year lease, the landlord should be willing to let you pay as you go which will strongly help the economics of what you are trying to accomplish.
3. Negotiate the rent as far as the landlord will move and then move on to concessions like free rent or tenant improvements.

I’m sure most people are already using something like Google Reader to track their favorite blog feeds.  If you’re not the I suggest you give it a try, especially if you read a few blogs.  We’re hoping that the Rofo Space Need Feed gives you one more reason to start tracking feeds.

When businesses are searching for commercial space they come to Rofo and post exactly what kind of commercial space they are looking for.  Then landlords and brokers make proposals and the tenant accepts what they like. The Rofo Space Need Feed tracks all these space needs and allows you to subscribe to feeds in different areas.  After subscribing, your reader will show an update every time a new Space Need is posted.

The Space Need Feeds cover the main regions in California where Rofo receives a substantial amount of space needs.  We will be rolling out feeds in new cities when we start to see more getting posted.  Here is a list of the feeds we have rolled out:

San Diego Area Commercial Space Needs

Los Angeles Area Commercial Space Needs

South Bay Commercial Space Needs (San Jose, Santa Clara, Cupertino, Sunnyvale etc.)

Sacramento Area Commercial Space Needs

Peninsula Commercial Space Needs (Palo Alto, San Mateo, Redwood City etc.)

Orange County Commercial Space Needs

North Bay Commercial Space Needs (Santa Rosa, Petaluma, San Rafael etc.)

East Bay Commercial Space Needs (Oakland, Berkeley, Walnut Creek, Fremont etc.)

So subscribe today and easily stay up to date with the market.  We’ll be rolling out new feeds in the future if your area isn’t up there yet.

Rent Types

1. NNN: Tenant is responsible for Property Tax, Insurance, Common Area, Maintenance, Utilities, and Janitorial
2. Industrial Gross: Tenant pays Utilities and Janitorial
3. Modified Gross: Tenant pays for Janitorial
4. Full Service: Tenant is only responsible for increases over the Base Year Expenses

Rent and Build out Issues

1. Escalations: The amount of your rent increases year to year. The most common increase types of CPI (Consumer Price Index) or a percentage (3-5%).
2. Tenant Improvements (TI’s): The interior improvements within the space that is spent prior to your occupancy, less Fixtures, Furniture, and Equipment.
3. Amortization: Any costs that a landlord pays for and then passes through to the tenant over the period of the lease. For example, a business might need 3 extra office constructed at a cost of $15,000. The landlord might offer to amortize the cost of these improvements into the rental payments a company make each month.
4. Plug and Play: The space will come furnished and wired.
5. Turnkey: Referring to an owner making a property ready for a tenant to begin business by having the tenant furnish only furniture, phone and inventory, if any. Turnkey tenant improvements are provided at the landlord’s expense according to plans and specifications previously agreed upon by the parties.
6. Work Letter: Specifications for tenant improvements usually attached to a lease and/or letter of intent. The work letter provides the basis for working drawings and contractor pricing and may allocate costs between the parties.

Space Issues

1. Load Factor: Load factor measures the common areas of your building that are built into your rent including the lobby, elevators, supply areas etc. For example, if the load factor is 10% and you are leasing 2,000 square feet space, your usable square footage is actually 1800 square feet.
2. Common Area: The common area is the area of the building that is allocated to each tenant but is not directly controlled by any one tenant. Some examples include the lobby, elevator, bathrooms, supply closets, and mechanical rooms.
3. Usable Square Footage: The amount of square feet measured within the confines of the tenant’s space, without a load factor.
4. Rentable Square Footage: The square footage that is advertised and listed in your lease. The Rentable Square Footage Includes a load factor or your percentage share of all building common areas.

Expenses

1. Common Area Maintenance: Amounts charged to tenants for expenses to maintain hallways, restrooms, parking lots, and other areas.
2. Base Year Expenses: A lease condition whereby the landlord agrees to pay an expense amount based on the expense for a base year (typically the first year) of the lease, and the tenant pays the increase in expense for subsequent years. For example, if the total building expenses are $100,000 in your Base Year, and the following year expenses are $105,000, the tenant would be responsible for their % share of that $5,000 expense.
3. Holdover: This is the situation where a tenant remains in the space after the lease term expires. Most holdover provision will be somewhere between 150-200% of the current monthly rent.
4. Sublease: Used to convey some or all of the property rights that a tenant has under a commercial lease to a third party for a portion of the tenant’s remaining term of the original lease.
5. Assignment: This is the concept of assigning your lease to a 3rd party with the landlord’s approval and removing the lease liability from your organization.
6. Nondisturbance: So long as lease is not in default, its rights to occupancy under the lease will not be disturbed by the lessor or its successors or assignees.
7. Right of First Offer or First Opportunity: A right, usually given by an owner to a tenant, which gives the tenant a first chance to buy the property or lease a portion of the property if the owner decides to sell or lease. Unlike under a Right of First Refusal, the owner is not required to have a legitimate offer which the tenant can then match or refuse. If the tenant refuses to make an offer or if the parties cannot agree on terms, the property can then be sold or leased to a third party.
8. Right of First Refusal: A right, usually given by an owner to a tenant, which gives the tenant a first chance to buy the property or lease a portion of the property if the owner decides to sell or lease. The owner must have a legitimate offer which the tenant can match or refuse. If the tenant refuses, the property can then be sold or leased to the offeror.
9. Renewal Option: The right of a tenant to renew (extend the term of) a lease for a stated period of time at a rent to be determined (i.e. 9.5% of “fair market rent”).
10. Relocation Clause: Any clause in the lease giving the landlord the right to move the tenant during the lease period.
11. Pro-Rata Share: Percentage of building occupied by the tenant, which is usually based on the rentable or leasable square footage measurement of your space compared to the rentable or leasable square footage of the building.

Bill from LazarsEarlyMusic.com, one of the largest dealers of Baroque era musical instruments, sits down with Rofo to talk about his quest for the perfect San Jose and Santa Clara area office space. He eventually found it with the help of Rofo and commercial real estate broker, Jana Gluckman, from Ritchie Commercial. Bill also gives some great tips about looking for office space and finding the right broker. He also chose to buy his new commercial space instead of leasing and talks about that decision. Bill’s been operating Lazar’s Early Music for 15 years after leaving the bio tech sector.

You mean to tell me it’s not just Location, Location, Location? Below we will reflect on how most companies make the decision about where to locate the office.

1. Location, Location, Location: Not only a real estate adage, but a fact of life. The location of the office is usually described as the either the biggest benefit or biggest negative.
2. Commute Patterns: Take a preliminary survey of your companies thoughts on their current commutes and use Rofo’s tool to determine how the new office location might effect their commute pattern.
3. Amenities: What restaurants and coffee shops are available nearby? Being in an isolated office park can be a very bad situation for the comfort of employees. At times in cannot be helped, but being in close proximity to the amenities employees use during their lunch break can be a huge recruiting advantage. Please see our Rofo Amenities tool to look for nearby amenities as you search for space.
4. Safety: What is the neighborhood like late in the evening? Have there been office or car break ins in the neighborhood recently? Would a female employee feel comfortable walking to their car or public transportation after working late on a project? All of these issues should be considered when considering your next location.
5. Layout of the Space: Is the layout of the space desirable. Is there good separation between the lobby and the work space? Is there separation between the kitchen and the work space so food smells don’t permeate the office. Is there good natural light?
6. Image of the Building: The question depends on how you are trying to present yourself to your clients and potential employees. If you are a law firm that helps with class action suits, it might not make sense to have the top floor of the nicest building in town. If you are the high powered corporate firm, it might be absolutely necessary to display that image. The location, layout, and feel of your building and space will leave an impression on your visitors and should be considered in your decision making process.
7. Parking/Public Transportation: The proximity to public transportation and affordable and convenient parking are extremely important. Many of your key employees might need quick access to transportation as they visit clients while others need convenient and affordable ways to get to the office. The more transportation options the better.
8. Recruiting: Will your location and building aid or hamper you in your recruiting efforts for top talent. How will the location effect current employees?
9. Expansion: Will your location allow for easy expansion? Is there space available nearby that can work if there is not space within your building?
10. Building Ownership & Maintenance: Is the ownership local? Is the HVAC system consistently broken? Your landlords involvement and attitude and responsiveness towards tenant repairs should be a critical element of your building decision.

1. How active is the broker in the marketplace?

If the broker you hire is very active in San Jose, but never works in Oakland, it would be a mistake to work with them. They might be worth hiring if they can prove to you that they have the ability to find the tough to find spaces and get information on the most recent transaction. If they can pass both of these hurdles and seem qualified, an out of town broker can provide the right level of service. If not, ask them for a referral to a local broker.

2. How long have they been in the business?

Less experienced brokers might work very diligently but you are more exposed to common mistakes. Veterans of the industry can quickly make you aware of common mistakes and help you avoid them. A good rule of thumb is within 3 years, a broker has learned all the necessary tricks of the trade.

3. References?

Will the broker provide some contact information for recent clients who can speak to their diligence throughout the process? Questions you ask these references should be specific based on negotiating skills and time spent on the process.

4. Do you have a specialization?

Many brokers specialize in types of firms or industries. If you can find the broker who specializes in your industry, you might get a leg up in the negotiation. Specialized brokers might have some other clients who are going through the process at the same time and excess information helps throughout the process.

5. Do you have any conflicts of interest?

Some brokers might work for many landlords throughout the city. If they do, at times their fiduciary duty is challenged when they represent both parties. Most brokers are ethical and this would not create a bad situation, but exceptions do exist.

Denver Business Journal – by Paula Moore

Grubb & Ellis Co. predicted Friday that the Denver area’s commercial real estate market will start a “slow recovery” in 2010, ahead of the national commercial market that’s expected to bounce back in 2011.

Based in Los Angeles, publicly traded Grubb & Ellis (NYSE: GBE) is one of the country’s — and metro Denver’s — largest commercial real estate brokerage firms.

While there will be leasing activity in the metro area this year, commercial property vacancy rates will likely stay flat because most tenants will move laterally to take advantage of attractive lease rates and landlord concessions, according to the G&E report.

The Denver-area real estate investment market is expected to remain generally flat in 2010, but buyers with cash are expected to purchase lower-priced properties, including distressed assets.

Metro Denver ranked 10th on G&E’s “Investment Opportunity Monitor” for 2010-2014, based on property, economic and demographic variables. Only Texas cities such as Houston and Austin; California markets like Los Angeles, San Francisco, San Diego and Orange County; Washington, D.C.; Portland, Ore.; and Raleigh-Durham, N.C., are expected to do better than the Denver area when it comes to commercial real estate investment.

“Leasing activity will certainly increase, and there will continue to be a large quantity of properties attractively priced for buyers with cash,” Mark Ballenger, executive vice president and managing director of G&E’s Denver operation, said in a statement.

Bob Back, G&E’s chief economist, thinks that while the national economy has started a “slow and cautious” recovery, the labor market won’t turn around until the second half of this year, since it often lags the broader economy.

“Because commercial real estate lags the labor market, [the national commercial real estate market] still has a ways to go before reaching its own low point,” Bach said in a statement.

Other high points of G&E’s Denver forecast:

• Most commercial properties sold this year will be “come in the form of note sales and other non-recorded transactions.”
• Highly leveraged, lender-held buildings will get new owners, removing a major impediment to the recovery of the real estate investment market.
• Many larger office-building tenants will try to capitalize on lower rents and concessions offered by landlords at Class A and B properties, causing Class C properties to struggle to keep tenants.
• Metro Denver’s industrial real estate market is expected to see “positive growth and activity in 2010” when it comes to leasing, with renewable energy companies likely being responsible for most of that activity.
• Retail leasing in the metro area could see a moderate increase in activity this year, with grocery-anchored shopping centers as well as urban sites staying “fairly stable.” Most of that activity will come from educational and professional service businesses, taking advantage of lower asking rents.
• Job growth will be key to improvement in the local apartment market. (Even though apartment properties include residences, they are considered commercial real estate because they’re largely owned by companies or investors who don’t live there.)