Leasing terms every tenant should know

Why is landlord asking for my Financials?

Landlords need to see financial information from all prospective tenants to determine if they want them in their buildings. The stronger a tenant is financially, the more attractive they are to the landlord and typically the better concessions, base rent, build-out we can achieve for a tenant. If a potential tenant doesn’t have adequate financial information, a landlord will either:  (1) reject the tenant, or (2) ask for a personal guarantee and in addition ask for a larger security deposit. This is generally the case with cash based companies or start-ups.

What is a Security and Lease Deposit?

The amount of required security deposit will vary based on the landlord's financial assessment of the prospective tenant. At Fountain we always advise our clients to submit as much financial information as possible in order to negotiate a lower security deposit for you. The first 3 pages of you last year’s Tax returns, a bank statement, and/or accounting P&L statements from your CPA are all valid forms tenants may submit.

Additional Utility Charges?

On top of your base rent, and real estate taxes, there may be other charges you will be responsible for:

Electricity: This is billed in one of three ways:

1) Direct – You pay your own electric bill directly to Coned or the electricity provider of the building.

2) Sub-metered – there’s a meter in your space or on the floor which belongs to the building (not the electric company) and on a monthly basis management  of the building will bill you for your use.  Managements will often also add a surcharge of 5-10% to your bill.

3) Per square foot/per year: this is usually between $3 and $3.50 per square foot per year regardless of your usage. For example, in a 1,000 sf space with the electric at $3.50/sf, the monthly electric charge would be:

$3,500 per year/12 (months) = $291

*Other charges tenants are frequently held responsible for are water, sprinkler, sewer, security guard, and/or garbage removal. These are usually billed as flat monthly charges ranging from $15-$45.

Proportionate Share of Real Estate Tax Increase?

New York City real estate taxes are assessed every July. Each building is assessed a different tax every year. Sometimes the tax on a building does not go up, but it usually does and when it does most landlords do make efforts to have this reduced.

For example: A 100,000 square foot building pays Real Estate Taxes of $300,000 in 2008/2009 and increased in 2009/2010 to $310,000; therefore, the total Real Estate Tax increase for this year was $10,000. You occupy 1,500rsf or 1.5% of the building. Consequently, your proportionate share is $150 for the year. ($10,000 X 1.5%).

Note that Real Estate Tax information is public information you have the right to receive as a tenant.

What is Office liability insurance?

Office liability insurance is a necessary expense every New York City tenant must plan for. All landlords will require tenant have this coverage in place prior to taking possession of a new space. Coverage required can generally range from $1M coverage per 1,000rsf and can cost as little as $600/year. Most plans also include property loss coverage at no additional cost to tenant so be sure to ask your insurance agent.

What's a Good Guy Guarantee?

A good guy guaranty is a common lease guaranty in New York City which has became an important and usually a demanded clause by and for both landlords and tenants in structuring a commercial lease. By way of background, the good guy guaranty was originally created by landlords to motivate tenants to surrender possession and avoid arduous landlord-tenant litigation. For tenants especially for start-up companies, it’s a limited guarantee which allows companies to lease their first space. For a full explanation please click here

What is Loss Factor?

What is the difference between "rentable" and "usable" sqft?
-To get the answers to the above question plus much much more, please read our article "Loss Factor Explanation" by clicking here.

Why Can't I Find A One Year Lease?

One of the primary reasons most investors purchase commercial buildings is due to the low management needs of tenants. Unlike residential buildings where on a yearly basis sees large turn around, commercial buildings tenants generally sign 3-5 year leases therefore minimizing managements overload. Also, taking  into account that most landlords will do basic build-out work for tenants, a 1 year lease wouldn't make financial sense for an owner to do any work.

How Do I Get Approved As A Start-Up Business?

As a start-up business simply demonstrating a good model and/or business plan is not sufficient to get approved. Landlords essential need to be assured that a tenant will financially be able to complete the lease commitment. Taking into consideration that a start-up may not have tax returns, showing a healthy operating bank account, investor term sheets or any other financial proof that tenant is well backed, can help tremendously.  Our most successful strategy to get start-ups approved, is to provide ownerships with the tax returns of the company’s principal founder, manager or even investor.

What If I Outgrow My Space?

Out growing your space is a ‘good’ problem to have. Considering that ownerships are in the leasing business, most ownerships are okay with relocating you within their portfolio into a larger or sometimes even smaller space if needed.

What Should I look for when reviewing my lease?

Look for additional incentive such as a ‘freshening’ of the space or other work to your space.

When should I start looking for office space?

If your requirements are to get a space below 2000 sqft we advise that tenant begin their search 4-5 weeks before a needed move-in date. For larger spaces 7-8 weeks before is ideal.

What is Prebuild?

Prebuild is a term used by management companies in marketing spaces that have been newly build out and ready for an immediate move in.

What is a Sublease?

The sublease is an arrangement in which someone that is renting a piece of property turns around and leases it to someone else. In most situations this is called a sublet. At that point, the individual that was leasing the property moves out and starts collecting rent payments from the new renter. The original renter is going to continue making rent payments to the owner of the property over the entire course of the lease.

What is a Holdover clause?

Holdover is a provision in a lease that determines what happens when the tenant remains in the space beyond the expiration of the lease. Generally, this lease clause will penalize a tenant should they become a ‘holdover’ tenant by charging them 1.5-2 times the monthly rent until either a new lease agreement has been settled or the tenant vacates.

What is Rent Concession?

Otherwise known as ‘free rent’, this is a period of time usually between 1 and 4 months given by a landlord where by the tenant is not responsible for the payment of base rent. However, most free rent periods don’t omit tenant responsibilities for payment of utilities such as electric.

What are Rent Escalations?

Generally in lieu of operating expenses and to cover for inflation, ownerships require that an annual increase in rent be part of any commercial lease. Most commonly, 3% is the percentage used, although CPI (Consumer Price Index) is also sometimes used to determine the annual increase in rent.

 

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