Office Space Advice in an Uncertain Economy aka READ YOUR LEASE!
Yesterday, the stock market had its worst day since 1987, that day was called “Black Monday”. Today, the Dow Jones Industrial Average had its largest point gain ever. Yes, ever.
I don’t pretend to be an expert in the stock market, in fact I intentionally avoid looking at it, life is stressful enough. I am however, an office space expert with 15 years of experience and a degree in Economics from U.C. Santa Barbara, which is currently ranked #7 nationally for public universities. Of course, when I was admitted to this fine institution our rankings were mostly related to being the best party school, but they can’t take back my degree now can they!
So let me stay away from predictions, and let me instead focus on preparation. In down economies, several things happen in my industry, including:
- Tenant headcounts decrease, less office space is needed, and less office space can be afforded.
- Ownership value decreases, due to lower asking rents, and less demand for office space from tenants.
These are simple ideas, you already know these things, but notice that these are real-time trends, each one can occur passively, without any kind of a renegotiation between the two parties. The change in the economy has created a situation in which the tenant wants to pay less, and the ownership group wants to collect more. We now have a friction point, and we can either turn to lawyers, or we can turn to the lease.
The lease! The lease can be your friend, but man can it also be your enemy. We have been on a ten year upcycle, and one of the things that has been concerning me professionally the past five years is that many tenants have been focused on securing office space, and not focused enough on the lease. The role of the lease is to protect you, but it is only as protective as the day you signed it. If you sped through the lease negotiation, you might feel some pain in a down economy. But if you had a great broker and a great lawyer work hard on your behalf during the lease negotiation, the lease might just be your best friend.
So pick up your lease! And look for these sections:
Option to Terminate: This is a home run solution that you probably do not have. But if you were able to secure this right, you can either trigger it or you can use it as leverage in order to create a new deal. You should fight for this in your next lease, even if the price to terminate seems excessive. You may find that paying an excessive fee to end a lease is better than shutting down your business.
Assignment and Subletting: Almost every lease has this right, but the details matter. Some leases do not allow you to sublet to another tenant in the building, or even a tenant that has recently toured the building. Often, if you sublet space, you lose other rights, such as an Option to Extend. Some leases allow you to sublet, but only to an entity with a larger net worth than you have, which can be challenging in a recession certainly.
Give Back Rights: We try to negotiate a right to terminate on a partial space. Perhaps give back a floor, or half a floor. As you might imagine this is powerful during a down economy, and worth fighting for when you first move in.
Executing Entity/ Security Deposit: Did you sign the lease as a parent company? Or as an LLC? Can you shut down the entity on the lease without killing the parent company? And what kind of a securitization did you put up? Is it cash, or a Letter of Credit, or a guarantee? Shared space operators recently have been signing leases as stand-alone LLCs, with no parent company guarantee, and with a large cash security deposit. This allows them to crash the LLC, Bankrupt the entity, and walk away from the cash deposit. Essentially they turned the deposit into a Right to Terminate with a cash penalty.
Attornment/ Subordination: What happens if the Landlord has to turn the keys back to the bank because the property value decreases below the obligation of the mortgage? Often the new ownership entity will “have the right, but not the obligation” to honor your lease. You could be kicked out of the building, or be forced to renegotiate under duress. This was a real problem for many tenants during the last recession.
If you have any questions on these issues that I can help answer, please feel free to reach out. Also please consider reading a piece I wrote entitled “How to Hire a Top Flight Commercial Real Estate Broker”, or watch a video I shot while at my previous firm called “Negotiating Flexibility into Office Leases for Tech Companies”.
Senior Managing Director
Newmark Knight Frank
Office Space Advice in an Uncertain Economy aka READ YOUR LEASE! was originally published in Tom Poser on Medium, where people are continuing the conversation by highlighting and responding to this story.