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The team approach to lease negotiations.

The vacancy rate for office space in New York City continues to be in the low single digits, while Class A space in the first quarter of 1999 stood at 4.3 percent. This near historic lack of availability, combined with a robust economy, has increased the challenges space users will face for several years.

Effective lease negotiation, providing tangible economic and legal protection for a tenant, must be approached in terms of the state of the commercial real estate market. In the current environment, facility managers must have access to a team of professionals with the expertise to identify a company's real estate needs and to develop creative solutions to space requirements. All effective team approach will unable a professional services firm, corporation or a not-for-profit organization to act swiftly when required, and to seize opportunities that might otherwise have been lost.

In a market in which demand far outweighs supply, knowledgeable tenants select a tenant representation specialist who can approach a problem with fewer conflicts of interest than other types of brokers. The days when brokers merely "showed" available space are long gone. Brokers today need to think outside the box to meet their clients' current and future needs. Brokers must be knowledgeable about many sub-markets and be able to supply clients with as many space options as possible.

A tenant representative will be armed with examples of recent transactions in comparable buildings, and with a short-list of "wildcard" spaces that are not yet available, but that may come onto the market within a 12- to 18-month period. A broker who understands the tenant's goals can use financial modeling to structure a transaction in ways that are advantageous to the client and identify out-of-the-ordinary solutions to space needs.

For example, tenants are now signing leases on First Avenue by the Midtown Tunnel and on Tenth Avenue by the rail yards, as well as at other locations that were once at the bottom of the alternatives list.

A company's pre-move planning should involve the hiring of an architect or space planner to evaluate and program the company's requirements. square offices and cubicles no longer dominate the office environment. Today's interactive workspaces, with no-wall offices that promote the team approach, allow for increased options in the space search, and the potential for greater employee productivity. In addition to square footage, lighting, traffic flow and other layout designs, an architect must consider items such as electrical, HVAC systems and voice/data issues that could affect tenant improvement allowances during negotiation. A space planner brought in prior to the lease negotiation can add value to a project far outweighing their fees.

Another key player on a lease negotiation team is the attorney. Tenants should retain a lawyer with a real estate specialty in the city that the tenant is considering. This is especially true in New York City, where commercial leases are known to be excessively restrictive on tenants. An example of this is a sublease clause, which prohibits a tenant from subleasing space to any other tenant within the building owner's entire property portfolio, thus limiting a tenant's flexibility to attract subtenants and relocate in a timely manner. Smaller tenants must also be aware of relocation clauses that allow the owner to relocate a tenant to a different floor in the same building on limited notice.

These and other clauses could cost tenants tens of thousands of dollars if not addressed during the lease negotiation. A lawyer should also include specific language in a lease to provide flexibility for the tenant to expand, sublease or relocate in the event of future growth.

The tenant's broker should also negotiate an "escape" clause, which gives the tenant the opportunity to exit from a lease obligation at certain points by paying the landlord a predetermined stun. This serves as an insurance policy that might help the tenant avoid a lengthy and aggravating subleasing campaign, should their space requirements change.

Another important consideration for tenants is the issuance of a workletter by the building owner detailing the base building construction costs the owner will absorb. However, workletters are very specific and complex, Technical issues or additional work not previously negotiated may push construction costs far over budget.

Tenants considering an older building will want to research whether the prospective building has the adequate electrical capacity to handle its requirements for such items as supplemental air conditioning and computer networking. If it does not, costs associated with upgrading the building should be addressed early in the negotiation.

In addition to a tenant representative, space planner and real estate lawyer, several different consultants should be added to the lease negotiation team earlier rather than later. These include a telecom specialist, an engineer, a relocation/moving consultant and a furniture consultant. While each transaction will necessitate a different team composition, the tenant representative will be able to suggest the proper team make-up.

To operate effectively in file current real estate market, savvy organizations must adopt pro-active strategies and assemble a professional team to address the challenges of negotiating a lease that will benefit them in the future. This team will provide cost-effective solutions to space needs, while creating a flexible lease document enabling the organization to be as agile as possible in their own competitive industry.
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Title Annotation:Focus On: Commercial Sales & Leasing
Author:Miller, Marc S.
Publication:Real Estate Weekly
Date:May 19, 1999
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