4 Essential Office Leasing Tips for Non-Profits

Non-profit organizations are typically more cost-sensitive than for-profit companies and usually have unique funding schedules and decision making processes that must be recognized and accommodated for.  Maximizing value and crafting flexible terms during an office relocation or lease renewal should be paramount to your real estate goals.

1. Hire a real estate advisor. Adding a seasoned real estate professional to your team is going to prove invaluable, as they help navigate your organization through the tricky waters of the commercial real estate leasing industry. They’ll also help to level the playing field when negotiating with landlords and their brokers, and they’ll do all the heavy lifting so you can spend your time focusing on your core business and furthering your organization’s mission.

Since leasing commissions are paid by the landlord, and NOT the tenant, there’s absolutely no reason why you shouldn’t access your right to professional representation. Remember, “a lawyer who represents himself has a fool for a client.” Give preference to a broker who has board experience with non-profits, as they’ll understand important nuances and be able to structure the best deal for you. Also, don’t be shy – ask your broker to make a donation out of their real estate commission to your organization after the transaction is complete.

2. Don’t spend too much on rent. Foundations and donors carefully scrutinize your organization’s budget, and want to see that the majority of their money is being spent on the mission and not just your operational costs. After employee payroll, the office lease is typically the next biggest expense on your income statement. Therefore, slimming down your office rent is going to make your organization look more attractive to money sources while freeing up much appreciated liquidity.

Attracting and retaining top talent is important, so try and find the nicest space at the best cost and make sure you’re being mindful of how efficient the building you’re moving into is. A good rule of thumb is to identify properties where other non-profits have made their home, and then ask a few current tenants if they’re happy with their experience at that property.  Being around other non-profit organizations is also conducive to collaboration and strategic partnerships.

3. Align the lease with funding your schedules.  It is crucial that you make an assessment of your organization’s key funding dates and schedules, and then share that information with your broker so that they may structure an office lease that is not only congruent, but complimentary to your timing.

For example, if your largest grant is renewed every two years, then you want to ensure that there are strategies in place to respond to the unfortunate scenario of the potential discontinuation of that grant. The current stage of the real estate cycle, your leverage as a tenant, and the willingness of the landlord to work with you will all play key factors in what strategies are employed.

Should office rental rates be trending downwards, then an easy solution would be to simply make your lease coterminous with your funding schedules and include tenant friendly renewal terms. However, if rents are rising you’ll want to lock in a low rate and sign the longest lease your strategic plan will allow for, and then build in early termination clauses.  Another solution could be to negotiate terms that will give you the flexibility to be relocated within the ownership’s portfolio without penalty, should you need to downsize substantially.

4. Get free furniture.  One of the most unnecessary expenses upon moving is the cost of relocating existing or purchasing new office furniture.  If you’re relocating your office, give preference to “Plug & Play” subleases where the subtenant is allowed to acquire or simply use the existing furniture for no additional cost throughout the duration of the sublease.

If you have to leave furniture behind, consider donating it to another fellow non-profit, as the cost of disassembling, moving, and reassembling office furniture can sometimes cost almost as much as simply buying new office furniture anyways. If your new location does not have furniture, consider looking for used furniture. Not only will harmful VOC’s (volatile organic compounds) already be “off-gassed” which will help improve the indoor air quality of your new office, but many companies give away unwanted furniture to non-profits so as to benefit from the tax deduction.

When is the Best Time to Renew an Office Lease?

There’s a bit of alchemy involved when concocting a recipe for the Perfect Renewal.  Factors such as the tenant’s size and credit worthiness, how much term is remaining on the lease, and the landlord’s position within the context of the overall market all play a key role in determining the best renewal strategy.

One of the first things to consider is the general direction the real estate leasing market is heading, from both a macro and  micro level.  Base rental rates typically escalate annually between 2.5-5% when you’re locked into a lease, therefore if market rents are outpacing that rate and will be for the foreseeable future, then a longer lease such as 5-7 years is advisable, from the tenant’s perspective.  If however rents are falling, then negotiating the shortest term possible (without forfeiting rights that would cause you to lose the space altogether) will allow you to renegotiate better and better terms until the cycle again finds the bottom.  This strategy runs counter to the landlord’s goals, however, as rental rate reductions cut into their bottom line.  The tenant’s broker must then identify other ways their client’s tenancy can benefit the landlord, and be able to effectively articulate and negotiate using them.

Many factors will play a role as to how far in advance of the lease expiration the tenant’s real estate advisor should begin dialogue with their client’s landlord, but the single most important factor is that there is enough time to locate, negotiate, and relocate to another competing property, even if the tenant’s goal is to simply stay and renew.  Commercial leasing is a business, and the tenant is the landlord’s customer who will pay a substantial amount of rent, over time.  It is only fair, then, that the tenant’s potential new transaction be brought to the open market where other landlords can compete for their business.

Fear of Loss is a powerful thing, and by touring the market and viewing alternative properties and perhaps even accepting unsolicited proposals from other buildings, the tenant’s landlord knows they must put their best offer forward or lose an income stream to another property.

There are of course many, many other factors that a tenant should consider when timing their renewal; tenant movement within the building, the landlord’s current fiscal position, and even competing landlords’ aggressiveness to “make deals”  (a landlord in the Jack London Square submarket of Oakland, California recently lured a 40k square foot tenant to relocate a year in advance of their expiration by offering them a full year of free rent).  Early renewals well in advance of the contract expiration are also typically achievable using a “Blend and Extend” strategy.

What’s most important is that the tenant hires the right commercial real estate advisor who knows the market cold, and does not underestimate the time required to implement a full real estate process so as to yield the absolute best terms possible.

See also:  Should I Hire a Real Estate Advisor When Renewing My Lease?