NYC office lease
When businesses are looking to get out of their NYC office lease they have to consider several factors including:
Lease Term- How long of a lease should you sign? Is it better to go long term and lock in your rent as well as the assurance and stability that comes with a permanent address? Or, is it better to sign short term giving up some certainty for flexibility?
Rent- what is your monthly budget? Having a cheap grungy space could make it hard to recruit and having too nice of a space could send the wrong message to customers and VC’s.
Location- What is the ideal neighborhood for the business? How does the team get to the office? Are there food options nearby? Where are your customers?
With the cost of attracting and leasing office space often running upwards of $60–$70 per square foot (build out, free rent, attorney fees, and commissions), most NYC landlords are requiring companies to go long on office space- signing 5, 7, and even 10-year leases.
This allows the landlord to amortize the capital commitment over a longer term and translates into more competitive rents for tenants. However, for businesses, there is more uncertainty now than ever before.
With the ever changing geopolitical, economic, and security climates, businesses are having a hard time figuring out of how much space they will need next year let alone five years down the road.
What happens when your educated guess was wrong and you need to quickly pivot finding yourself with too little or too much office space?
Businesses are constantly experiencing fluctuations in the size of their staff. If your business is doing well and you land several new clients you might need to quickly ramp up and do a lot of hiring. A good problem, but if you’re locked into a long term lease in a space with no room for growth hiring could be difficult at best.
An Ounce Of Smart Planning
As the saying goes, “an ounce of prevention is worth a pound of cure.” The first thing you should try to do is negotiate flexibility into your lease in the form of options. Options for growth and options to the contract could be difficult to negotiate but invaluable when you need them.
There are several forms of options including a termination option, Right of First Refusal, and fixed expansion rights.
Termination Options are options held by either the landlord or tenant which allow for the termination of the lease under certain circumstances or at specific points in time.
Often times there are costs associated with these options called termination penalties. Typically, a tenant will ask for an option to terminate midway through the lease term with a penalty equal to the unamortized leasing costs plus some pre-negotiated penalty amount.
This could be a significant out-of-pocket expense but the savings created could be substantially higher. Landlord’s love growing tenants so negotiating rights to expand such as a Right of First Offer (ROFO) are usually more productive.
A ROFO is a right by the tenant to lease a particular space before it comes to market. This right is usually at a multiple of Fair Market Value (FMV). TIP: Be sure that this right includes the language “including all relevant factors” so that concessions are considered and included in determining the FMV.
Fixed expansion options are similar to puts on office space. A growing company that doesn’t want to be hamstrung by being short on space should consider fixed expansion rights into contiguous spaces or floors at predetermined times and at predetermined rates.
Including these clauses in your contract is going to require a little give on your part as well. One of the great things about these options is that if your landlord will include what you want you can sign a lease for more months than you or the broker had originally planned.
Tried & True – Subleasing Your Office Space
The most common exit strategy for businesses that need to get out of their office lease is to sublease their office space.
With no shortage of companies looking to lease plug and play, short term office space, today’s market is has become liquid, making it easier for companies to dispose of excess space quickly and often without much cost.
To sublease your office space you’ll need to understand your rights and obligations under your lease agreement. So dig out your lease and read through the sublease provision to understand what you are and aren’t allowed to do.
Most leases will allow you to sublease the space with landlord’s consent, meaning you’ll have to find a tenant, negotiate terms, negotiate the lease and the once it’s signed submit it for landlord’s approval.
When subleasing your space it’s extremely important to be well educated about both your lease and the market so that you don’t leave money on the table.
The question is how to go about finding a subtenant?
Leverage Your Network
Not only is social media is fantastic for connecting with friends, recruiting, and advertising but it is also a great tool to market your office space for sublease. Linkedin groups, Twitter, and Facebook are good places to start.
Pictures are worth a thousand words so take your time finding the angles that highlight the features of the space.
Post space details, square footage, the number of offices, conference rooms, the number of people that the office could accommodate, as well as the asking rent.
Another way to advertise your space is to list it online at one of the several listing services like Costar, Loopnet, Craigslist, or 42floors.
Here you’ll likely get much more exposure but be prepared to make this a full-time job for a couple of weeks while you field calls, show the office space to prospective tenants, and negotiate the deal terms.
Additionally, if the tenant is represented by a real estate broker you’ll have to pay a market commission to them for bringing the tenant to you.
Hiring a Commercial Real Estate Broker to Market Your Space
For those companies who don’t have the market knowledge, or more important the time to market their space, show it to potential tenants on a regular basis, negotiate deal terms, negotiate the lease, and do all this as fast as possible might want to consider having a commercial real estate broker represent them.
Why Is It Better To Use A Broker?
Having a real estate broker represent you will not only reduce the amount of downtime, they will also help to establish pricing, concessions, and lease terms saving you well over the cost of using their services.
Commercial real estate brokers charge a commission in addition to the commission paid to the tenant’s broker so be prepared to spend a little more. The average commission in NYC is 3.2% of the gross rent.
Companies that love with their current office but are faced with having too much space often choose to sublease.
Similar to having a roommate sharing an office has its ups and downs. There could be some synergies between businesses and you’ll want to be sure that the work environment of both firms is compatible. Recently, several office share marketplaces have emerged to facilitate this solution.
Pivotdesk is an online marketplace that matches companies looking to rent their space to companies looking to lease temporary space on a month to month basis.
To end your lease without a prior clause in your contract is going to be difficult but you do have options. The first one is obvious – ask your landlord to terminate the lease. Explain to them your situation and offer to give them plenty of time to find a new tenant. It’s possible that if the market is substantially higher than when you signed your lease they might be open to this conversation. The landlord will have some costs associated with finding a new tenant so be prepared to foot the bill.
If all else fails and you cannot stay in your space any longer you might have to break your lease. It is of the utmost importance to understand what your liabilities are per your lease when choosing to break it. Often times leases have an acceleration clause that requires a tenant in default to pay the entire value of the lease upon default. A compromise that can benefit both parties is to ask for a buyout.
If you have sixteen months left on your lease they might be willing to accept three months of rent to let you leave, saving you money in the long run and giving them enough time to fill the space without losing any rental income.
A Negligent Landlord
The last reason you might want to get out of your lease is if you have a negligent landlord that does not fix things as needed.
Countless things can go wrong in your office space while you’re a tenant and you need a landlord that will respond and make updates to the office quickly as things come up.
If they choose to not be responsive to your needs this is the most likely scenario for a company that will want to get out of their lease as soon a possible even if their business is growing at a healthy rate.
There is no easy way out of a long-term lease with a negligent landlord. The most likely scenario is that you will need to sue them and take them to court. The last thing you need while trying to run your company is to be stepping out of the office wasting time and money in the courtroom.
For most business owners and startup teams, time is their most important commodity they have and wasting time in court is the last thing they want to do. The good news is this scenario is extremely rare.
Ask for referrals or testimonials from other clients from your landlord and make this a point of emphasis as a clause in the contract with your real estate attorney.
Read about the best real estate attorneys in Manhattan.
Spaces Commercial Real Estate helps businesses in NYC find and secure great space. Whether you’re one person running the show or have a cast of characters to do your bidding we’ll help you find the right space and at the right price! Click below for more information.
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