The process of taking up a permanent (leasing/owning) office space can be daunting. Consideration has to be given to both soft issues, such as the company brand image and location for client accessibility, and to hard issues such as the total occupancy cost of the building. For most companies, the cost of facilities is second only to employees’ salaries and wages.
A building needs to work well for a business, and the lease document needs to accurately define, document and appropriately apportion the proposed costs. Here are some vital leasing tips for tenants that can be helpful.
Carefully analyse how much office space your business needs.
Leasing too much space can be an expensive mistake, costing millions of Naira per year. But leasing too little space can also present challenges that can impede the future growth of the business. Hence, it is important to accurately measure current and future space requirements prior to entering into leasing negotiations. An experienced space planner can assist by creating an inventory or space programme that will help identify the space needs of the various departments of a business and capture both the current and future growth requirements.
Location! Location! Location!
Deciding upfront on the geographic boundaries for your building search is an important factor to consider. It is important to consider proximity to current as well as future clients and employees. For instance, do your employees travel often to client sites or to the airport and is there significant traffic affecting travel time? Does the company receive many clients on site? Do you need a specific city or mailing address and is it critical to maintain the current business phone number? These are examples of some of the issues to consider as part of the location selection process.
What type of building or office space do you need?
The selection of a building class or type has much to do with the image or comfort versus cost balance. Naturally, most companies will prefer the best buildings, i.e. class A properties. However, this could be cost prohibitive and may not add true value to the business strategy. In some cases, class A assets may not be suitable at all, for example, research and development centres which have specific requirements that are not available in typical commercial spaces. As such, a balance between must have and wish list items (with their cost implications) needs to be maintained.
Does your company have special needs?
Examples of special needs include heavy parking, fibre optic telecom connections, redundant or back-up power feeds, back-up emergency generators, exterior signage, above standard electrical power or heating, ventilation and air conditioning (HVAC), high ceilings, dock-high or drive-in doors and/or specialised lab or clean room equipment. It is critical to identify your “must have” requirements early and incorporate them into the cost of each building option for proper selection on a qualitative and quantitative basis. The absence of just one of these highly variable factors may eliminate an otherwise acceptable building. It is also much better to address these issues upfront and not months into the process.
What is included in the landlord’s rental rate?
Not all buildings are priced using the same format. Many traditional Lagos office buildings offer leases on a “full service” or “gross” basis, meaning that the quoted price per square metre per year includes all “building service charges”, i.e. property taxes, insurance, common area maintenance, janitorial services and utilities (usually excluding diesel). These buildings typically offer a “base year” service charge with the tenant paying additionally for annual escalations (The base year is the calendar year when the lease begins). There are, however, new sets of buildings in Lagos that do not include these charges as part of the rent. Service charges and parking are kept separate from the headline rent and are negotiated as individual line items with the landlord. As such, it is important to identify all the cost components and avoid all “hidden” charges that can appear post signature.
Understand the “real” costs of constructing your improvements
Since it is rare to find space that perfectly fits your requirements, there is usually some interior construction required to reconfigure the space for your use. Such construction is known as tenant Improvements (TIs), tenant build-out or tenant fit-outs. These TIs can range from relatively simple items such as new paint and carpet installation that cost anywhere from N950 to N1,500 per square foot, to extensive new construction – especially if you consider leasing “raw” or “shell” space that has never been built-out(which can cost from N7,000 to N18,000 per square foot).
The key point to understand before your office lease is signed is what will the proposed build-out cost be? It is also essential to clarify with the landlord how much responsibility the tenant will have for these costs.
Managing first year vs. entire lease terms
As mentioned in point 5, although a few leases are structured with fixed lease rates for the entire term and most have provisions that allow annual increases (escalations) that may be predetermined or may float with the changing Consumer Price Index (CPI). A building’s service charges can also escalate annually. A smart solution to consider is negotiating a “cap” or ceiling on such increases. Also, make sure that you understand the proposed escalations for both the base rent and the service charges and then project and budget for these costs as you proceed through the term of the lease.
Consider sub-leases with both eyes wide open!
When looking for properties, understand that you may encounter both direct leases offered by landlords and sub-leases offered by current tenants who are looking to unload all or part of their current leased office space. Sub-leases offer attractive opportunities, such as free or inexpensive furniture, phone systems and greatly reduced rental rates. They however have their own limitations particularly around the lease term and expansion rights as this is dependent on the primary or initial tenant on the lease.
There is also the added challenge of the strength of the covenants of the primary tenant. Recall that a sublease creates a direct relationship with the existing or “primary” tenant, as well as an indirect relationship with the landlord holding the “primary” or “master” lease. As such, big problems can arise if the primary tenant goes into default during the term of your sublease.
Additionally, many subleases are offered “as-is”, i.e. without a TI allowance to offset your construction costs. Depending on the financial strength of the primary tenant, it may better to require that the primary tenant seek a “buy-out” of its current lease from the landlord. This will free up the space so that you can strike a direct lease with the landlord.
NEGOTIATE your lease document.
Compared to a building purchase which involves a one-time event with a seller, an office lease creates a long-term relationship between the landlord and tenant. In this relationship, both parties assume ongoing responsibilities and liabilities as defined by the lease document. As expected, landlords design leases to be skewed in their favour over a wide range of issues, such as service charges, TI build-out provisions, liability and insurance matters, and tenant default provisions. Hence it is important for the tenant to work with professional commercial brokers who are aware of market trends and are experienced in landlord negotiations.
Hire an expert commercial tenant/buyer representative to locate the best office space and negotiate a lease.
Most traditional brokers are landlord representatives and many place their signs in front of properties that they are leasing for their landlord clients. It is important for tenants to obtain their own brokers or tenant representatives who will have the tenant’s best interests at heart. Though many firms have both landlord and tenant representative clients, a “Chinese wall” is maintained to ensure no conflict of interest issues arise.
By Chinwe Ajene-Sagna, JLL West Africa