by Marcus Bowen, Right Site Asia,
Leasing commercial space anywhere in the world can be a complicated transaction, but in Asia, tenants have to be prepared for conditions and practices that may not exist in their home markets. Managers can help their companies secure the best deal possible by remembering these 19 points when negotiating a deal for new office or R&D space for their company.
1.The Brief
What are your objectives and essential ‘must haves’? While needs may change, a written brief helps avoid selective memory when the final decisions are being made (e.g. the new office will be ‘open plan’).
2.Choices, Choices
Create a simple options comparison table to track each possible opportunity using 10 preference criteria, such as availability, location, options to expand, proximity to clients, service quality, local amenities, total occupancy cost, and flexibility of the space. Never have less than 2 options ‘ready to go’. The industry conspires to reduce your options and competition tends to reduce your choices as well.
3.Landlord Anchoring Bias
Asian landlords are particularly susceptible to what psychologists call ‘anchoring bias’. They have a rental figure in mind. Market research does not support this figure, but they refuse to budge. They lose the deal, but are OK with that. The economic loss is secondary to losing ‘face’ caused by having to change their ‘anchor’ figure. How important are you (really) to the landlord compared to other existing and potential new tenants?
4.Pricing in Flexibility
Options to break, options to expand…lease flexibility comes with a cost. However, despite being fought over and costly to acquire, few are ever taken up. They may only be valuable as a bargaining chip at a rent renewal negotiation. Do you have a strategy to justify them? For complex installations, special lease conditions may be needed or incorporated in a side agreement (e.g. space for generators, out‐of‐hours chilled water supply).
5.Life‐cycle Cost
Cost of space should be expressed as a total lifecycle occupancy cost. There are templates to calculate this, which include everything from cost of financing the deposit (opportunity cost of the capital), realistic service charge costs to exit costs for reinstating the property. Factor in additional costs of running facilities outside normal working hours. Avoid making comparisons on any other basis.
6.Schedule of Condition
A factual, agreed record of how the premise was at the start of the lease is essential. Anecdotes abound of landlords using absence of this document to increase dilapidation claims, such as demanding compensation after ‘discovering’ pre-existing flaws in finishes that had not been documented at the time the tenant occupied the property. The problem is, few condition schedules are done in sufficient detail to remove these risks. Such a document is not usually part of a due diligence report.
7.Understand Your Broker’s Job
The good news: the broker usually receives his fee from the landlord. The bad news: this fee is rolled up into your lease. Landlords like it this way as it gives them control and arguably influence over the broker. Few tenants are bigger than their landlords, and agents appreciate this. The fee is a percentage of the rent and service charge, so there is no direct incentive on the agent to seek out a less costly deal. Remember that the agent will most likely be dealing with the landlord regularly on a number of deals and as a result will not want to undermine this ongoing relationship.
8.Is It Really ‘Plug and play?’
Some space is marketed as ‘fully fitted out’, ready to start work. But the reality is that you may need to allow additional costs to refine this fit‐out to your specific requirements – it is rare to find that ‘perfect fit’. In some cases, a premises may require so many minor changes that an entire new fit-out (and the rent free period that comes with it) could be a better option.
9.Dilapidations
Has the fitting out project been designed to limit these? Plan the fit out for ease of reinstatement when it is time to move out. Avoid too many alterations, especially those of a structural nature. Leave plenty of time for reinstatement (as this is a notional lease period and will form part of the landlord’s claim).
10.CAPEX Write-Offs
As part of calculating your total occupancy cost, plan the depreciation of assets. Consider differentiating between furniture you will use in another location and investment you will leave behind, to further ease the annual write‐off.
11.Rent Free Periods
You will want to avoid rent for at least the duration of the fitting out project. How this fit out period is treated in the lease will depend on tax avoidance and subsequent rental valuations. Some jurisdictions encourage the landlord to grant the ‘rent free period’ in a side agreement, providing a ‘permit to work’, only. Make sure that you check with your legal counsel to ensure that side letters are in fact binding in each respective market that you are operating in.
12.Strata Title
Buildings where the property has been sold off floor by floor to individual landlords are generally to be avoided due to limitations on flexibility and poor communal services. Landlords within the same complex will have different investment objectives/attitudes which may result in large variations in rental levels, tenant quality and maintenance.
13.Naming and Signage Rights
While attractive for those with a brand issue, naming and signage rights are seldom a good deal for the tenant. Some landlords organize small feature signage areas which can be equally as attractive to passing trade.
14.Bad Neighbours
Is the landlord enforcing covenants and other lease provisions on the other tenants? Add this into the assessment criteria. It is possible to negotiate a lease that keeps the competition away from your floor level or lift stack. In Asia, this is a significant concern because employees have been known to get poached by neighbouring competition.
15.Elevators
Capacity and waiting times at peak load are key to acceptability. Make sure this is part of the pre‐lease due diligence. If in doubt, get a competent lift engineer to check it out. Good offices can easily be ruined by this issue.
16.Get Local Legal Advice
If you are using an in‐house lawyer, make sure they have a (very) local adviser handling the actual transaction who is familiar with the local practices and laws. Language is an issue and any dispute will be assessed in the language of the local judge, whatever the contract says.
17.Deposits
Security deposits in Asia vary between near zero to massive (Japan, Korea), however, the key issue in any market is usually, ‘how safe is my deposit?’ There is a real risk of losing it all, although this is uncommon. Deposits held in interest bearing escrow accounts are virtually unheard of in China. Is there an opportunity to substitute a cash deposit with a bank guarantee?
18.Facilities management
Outside CBDs of world class cities and complexes operated by sophisticated developers, the facilities servicing may be provided by a company who knows little about modern FM and customer service. Don’t expect the cleaning to be very good. Can this be covered in the service contract?
19.Secret love
Lastly, don’t fall in love with one option (or location). If you do, keep it secret as it may be used against you during the negotiations. For the same reason, with deadlines, stay flexible and consider keeping them confidential.
Marcus Bowen is a director at CASP-R Ltd, a niche real estate advisory firm based in Hong Kong. You may contact Mr Bowen directly at marcus.bowen(at)casp-r.com.
Tags: Asia, commercial space, lease negotiations, office space, R&D space, tips