Five Good Ideas ®
Five Good Ideas for non-profits to manage their office space
Published on 25/11/2022
For many non-profit organizations, how to think about real estate, or their office space, is an important but often overlooked issue. From identifying specific requirements for space and location, ensuring relevant approvals are in place, to engaging key professionals to guide them through the process, there are many steps that non-profits need to consider before they can even start to negotiate their lease and occupancy terms. In this session, George Georghiades, Principal and CEO of Lexington Park Real Estate Capital Inc., presents his five ideas on how non-profits can best prepare, manage, and use their office space.
Five Good Ideas
- Be clear about your office needs
- Align with internal stakeholders and governance
- As you begin your search, consider reaching out to and working with specialists
- Be mindful as you negotiate your lease and prepare for occupation
- Don’t forget about the time after you take occupancy and your ongoing obligations
Five Good Ideas for non-profits to manage their office space: Session slides
Five Good Ideas for non-profits to manage their office space: Check list
Please note: This transcript has been edited for clarity.
Elizabeth McIsaac: Now while many of you are dialing in, I guess that’s an old term, as many of you are clicking in from across Canada, I’m speaking to you from Toronto, and I’d like to begin today’s session by acknowledging the land where we live and work, and recognizing our responsibilities and relationships where we are. As we are meeting virtually, I would encourage you to acknowledge the place where you occupy. I acknowledge that I am, and that Maytree is, on the traditional territory of many nations, including the Mississaugas of the Credit, the Anishinaabe, the Chippewa, the Haudenosaunee, and the Wendat peoples, and is now home to many diverse First Nations, Inuit, and Métis peoples.
We also acknowledge that Toronto is covered by the Treaty 13 with Mississaugas of the Credit. The territory is also covered by the Dish With One Spoon Wampum Belt Covenant, which is an agreement between the Haudenosaunee and the Ojibwe and Allied Nations to peaceably share and care for the lands and resources around the Great Lakes.
Now let’s move to today’s session, and I’d like to introduce our speaker for today, our expert. Whether sharing, leasing, or owning, nonprofits don’t always think about the terms of their office space, or in other words, their real estate.
But there are many steps to consider before starting to negotiate a lease and an occupancy agreement. Which key professionals can guide an organization through the process? What sort of specific requirements are needed in terms of space and location? Are the relevant approvals in place? Office space is a basic part of most organizations, and so there’s lots to consider. Our expert for today is George Georghiades. He is a Loran Scholar from the class of ’95. He was the first alumnus to sit on their board. And for a long time now, he’s been in real estate. You will note from his bio, which is posted in today’s session for the handout, he’s remarkably well-educated. He has a BA from the Ivy Business School at Western, a Master’s in public administration from The Kennedy School at Harvard, and a master’s of science and real estate in finance from the London School of Economics.
After holding senior roles at McKinsey, he co-founded Lexington Park Real Estate, where he leads their team of investment, asset management, and development professionals. Today, he’s going to share with us his five good ideas on how nonprofits can best prepare, manage, and use their office space. It is now my absolute pleasure to welcome George. George, over to you.
George Georghiades: Great. Well, thank you, Elizabeth. And thank you, everybody. Thank you to Maytree for this opportunity. I think the topic you’ve chosen today is very timely. I know so many organizations that have gone back to the drawing board to revisit their space needs after what we’ve all learned from COVID. And I think that today’s discussion is also great because it dovetails really nicely with the previous Five Good Ideas topic from 2021, where Nina Gupta from Galling talks about the need for physical and hybrid workspaces. So I feel like our discussion today is bit of a continuation of that conversation.
We’ll be starting from the point of view where organizations have actually identified their need for physical space, and have decided that they will not be entirely remote. This is important. These types of real estate decisions are really important because lease costs form a substantial portion of a nonprofit’s operating budget. In many cases, I’d say it represents the second largest overhead expense, after talent. The sad part is that organizations don’t pay much attention to leasing decisions, and don’t allocate the required resources both internally or externally for a whole bunch of reasons, likely because it’s not their core business. Physical real estate function is most likely under-resources or frankly, doesn’t exist in many organizations.
The biggest reason why we think that organizations don’t do a good job of this is the infrequent nature of the decision making around real estate. Leases are probably negotiated once every three, five, seven, or 10 years, albeit, there are some short-term leases out there, and so you could be doing this a bit more frequently. But the infrequent nature makes it very difficult for organizations to develop best practices and the real skills internally. I liken this to playing golf. I’m not a very good golfer myself. But if I told you, you could play golf, but you could only play every three, five, or seven years once, how good would you be at this skill? Not very good.
So the five ideas today that we’re going to discuss are five suggested steps in a non-profit’s leasing process. It’s not rocket science and the steps are actually very simple and logical, which is why I find it so difficult to watch tenants. As a landlord, I witness tenants every day, rushing through their leasing decisions. They’re entirely unprepared, not all of them, but many of them. They’re also not necessarily understanding the seriousness of the decision they’re about to make. This often leads to some pretty serious and unfavorable long-term consequences and outcomes, not just for the tenant, but for the landlord also.
So without belaboring this point, let’s dive into the five steps of commercial leasing, which are intended to provide some help navigating an infrequent, yet very crucial decision for many organizations.
1. Be clear about your office needs
The first good idea, or step one in the process, is to be clear about your space needs. This is essentially problem definition. What do most people say? Understanding the problem is usually half the solution. Absolutely true in this case. Every organization is different, and I think the old guidelines, they don’t apply anymore.
For example, in the office market, it used to be that it was three or four per 1000. So what does that mean? That means that for every three or four employees an organization has, you’d normally require 1000 square feet of space. I’m just not sure that’s the case anymore. I’ve seen too many, or so many transitions happen over the years. It used to be that private offices were it, and then they moved from private offices to bullpen style. Now I see a lot of bullpens moving to some private offices, but mostly hoteling or shared spaces to allow for hybrid work.
As an organization, once you’ve determined your physical and/or hybrid workspace model, I think you’re going to need to answer four questions before securing space. I think the first is really: What kind of space do you need? Do you need storefront retail, office space, industrial? What is it that you need? In answering that question, you’ll also then need to consider what’s important. Do you need visibility, exposure, signage for your organization? Do you need parking for your employees and visitors? What are you storing? How much storage space would you need? Are you moving goods on a regular basis, and do you require loading docks and racking space? What are you accessibility requirements? Do you need ramps, elevators, security, and so on?
These are all the types of things you’re going to need to determine to figure out what type of space you need. Second question I think you have to answer is: Just how much space do you need? The answer should be expressed literally in square feet, and then by category of use. So what do I mean by that? I mean: Do you need private offices? Are you happy with cubicles or shared desk space? How many meeting rooms do you need? Do you make stuff on site? Do you need maker space, lab space? You’ll need to identify how much of each type of space you’ll need up front. But you can’t just think about what you need today. Right? You need to think about your space needs in the context of growth. It’s the most significantly overlooked issue I think when tenants are space planning.
They don’t think about whether the location that they’re in, or that they’re selecting, has the ability to accommodate more space if they need it. If the space you’re in or you’re selecting can’t accommodate more space, then you likely need a shorter lease duration. And if the space you’re seeking can accommodate, then you need to work with your landlord to be able to secure that additional space on an as needed basis. You can do that by negotiating a ROFR or a ROFO. ROFR stands for right of first refusal, or ROFO stands for right of first offer.
You should try and negotiate those in your agreement so that as space comes up, the landlord comes to you first to determine whether you could grow into that space. I think representing your organization, you just have to make sure the space you’re selecting fits the growth aspirations that your organization has.
I think the third question you’re going to need to answer is just how long do you need the space for. Pretty simple question, and this has to components. I think the first part’s really easy. It’s: Do you need a short-term lease? Do you need a year, do you need two, do you need three? Do you need a medium-term, kind of a three-, five-, seven-year lease? Or do you need a long-term lease? You have to articulate that need. The second part’s more interesting, I think, because it really forces you to ask: Why do you need the office space? And how often are you actually going to use it?
In our portfolio we lease to a number of office tenants, and we also lease to a number of faith-based groups. They only need the space evenings and weekends, and so, as opposed to going out and leasing space that they’re not going to really be using 9:00 to 5:00, they’re subleasing from some of our other tenants, and so they’re effectively time-sharing space. Right? They’re just sharing the space based on the time of day and the day of the week, and it’s a really great solution that saves both the office tenant and the faith-based group money.
So the fourth question that you need to ask yourself in determining your space needs is geographic requirement. Do you have to be in the core of the city? Can you be on the periphery of the city? Is there a specific part of town that you absolutely need to be in? Does your location have to be close to transit? Are there deal-breaking amenities that you have to have close by? These are all considerations that can drive decision making. But the last thing I’m going to say on this topic is, no matter how big your budget, or how big your organization is, you’re going to need to have to prioritize these requirements. No tenant, unless you’re building on spec to suit your organization, no location’s going to actually meet 100% of your needs, so you have to be prepared to let go of some of your requirements.
What does that mean? I think you’ve got to create the right priority list. I think doing that’s absolutely critical. Set up your deal-breakers, your absolute must-haves, and some nice-to-haves, and be prepared to let some of those nice-to-haves go. To ensure you get this right, this being your space needs and the determination of the space needs, I urge you to spend enough time at this stage with all of your various stakeholders involved to ensure the needs are identified very thoroughly, because this stage will set the foundation for all of the following steps.
2. Align with internal stakeholders and governance
The second good idea, or step two in the process, really involves aligning with internal stakeholders and governance. So what’s your internal procedure to get approval? Your team needs to secure in principle approval from the board or decision makers before approaching brokers or landlords. Essentially, get your house in order before using external resources because you don’t want to waste others’ time. When you’re going through that process of securing approval in principle, you’ve got to be thoughtful about it. You’ve got to ensure that there is flexibility in what you’re seeking for approval because as you go out there to see space, like I said, you won’t be able to find all your requirements. So ensure that you’ve baked in flexibility in your budget, size and location in that approval so that re-approval isn’t required when you come across minor changes.
And of course, no approval can be made without keeping probably the biggest hurdle in mind, and that’s generally centering around the budget. How much can you spend? So you have to be clear and honest with your organization about the cost of securing real estate, both the one time up front spend that you’re going to need to outfit the space and/or move into the space and get settled, as well as the ongoing annual gross rental costs. So for those of you that you’re not really familiar with all the rental costs and what goes into it, I just want to walk you through some of this.
You’re going to need to identify all of the costs of real estate for the budget, like I said, including all the upfront, one time fit out costs. But then you’ve got to figure out: What’s the ongoing base rent payment that I’m making? That base rent payment is effectively net rent or base rent. It has a couple of terms, or minimum rent. But that’s effectively the payment to the landlord. In addition to that, there’s something called, aptly named, additional rent, which really pays for the expenses of the property. That includes property taxes, utilities, repairs, maintenance, all that kind of stuff.
At the end of the day, you only care about how much in total your annual rent will be. You have to be careful because unless you have a gross lease, which means there’s one number you’re paying and everything’s included, you have to think through the additional rent or expenses. They’re a big component of your rent, and they can vary from year to year based on inflation and other factors. I’ve seen tenants where they rent space, they might be paying $15 or $20 in base rent. Their additional rent is an additional $7 above that level. But within 12 or 24 months, their space gets reassessed, taxes go up, other costs increase, and they’re now paying not $7 a square foot for that additional rent payment, but $11. And that’s more than a 50% increase for them, and they didn’t budget for it, and it puts them in a really tough spot afterward. So just keep in mind that when you’re leasing in the commercial space, you have base rent and additional rent, and that additional rent can vary.
If you need help determining the budget, your broker should be engaged at this stage. You don’t want to go through the whole process of budget approval and then only to figure out that you’re not even close to what the costs are in the market. I think you’ll lose credibility, probably with your broker, but you’ll also definitely lose credibility with your board when you’re going in for that approval.
Final comment on this idea, and I can’t stress it enough, is start early, start early, start early. Give yourself plenty of time to do this. Set calendar reminders for one year in advance of your intended occupancy. Seems like a long time, but it’s not. The more unique and specialized the requirements you have, the earlier you’ll need to start. If you don’t start early, you’re going to lose leverage in negotiating, and that can severely limit your options for your organization.
3. As you begin your search, consider reaching out to and working with specialists
The third good idea, or the third step in the leasing process centers around getting the right advice. You’ve heard me talk about a broker. I think as you begin this search, you need to consider reaching out and working with specialists. It’s no different than any other aspect of your life. When you’re sick, you go to the doctor. When you have a broken toilet, you seek out a plumber. So when you are looking for real estate, commercial real estate, you need to find a qualified commercial real estate broker. I can’t stress enough that you need to be represented.
So they’re not the only one you need to find. Obviously, there are a number of specialists that you’re going to need, or you might need, including a real estate broker. You’re going to need a lawyer, an urban planner, and the urban planners will help you with zoning and permitted uses for your organization. You’ll likely need a space planner. If you’re fitting out your own space, you may even need an architect, multiple engineers in mechanical, electrical fields, and perhaps a contractor. That assumes that the landlord’s not doing your fit-out for you.
But effectively, the three critical consultants or specialists you’re going to need are a broker, a lawyer, and a space planner. So you need to engage a real estate agent who specializes in commercial leasing. Commercial real estate agents each have their own specialty themselves, office, retail, industrial, or multi-residential. So you’re going to want to find someone that focuses on the asset class you need. To be clear, the agent that helped you buy your home last year is definitely not suitable for this purpose. I see residential real estate agents trying to do commercial deals, and generally, they don’t do well.
So you’ve got to interview agents, and don’t be afraid when interviewing them. Ask them. How much commercial leasing have you done over the last 12 months? And not talking about their firm, but they, themselves. How many deals have they done in the specific real estate type that you’re seeking to lease? Thorough due diligence at this stage is absolutely required because they’re going to be guiding and representing your organization throughout this process. You’ll likely never personally interact with the landlord. The agent can effectively make or break your deal, and so trusting them is critical, so you need referrals from the right people. I think that’s what’s going to help too, to get comfortable around the person’s expertise.
The second outside advisor, and I probably consider to be probably the most important really, is a lawyer who specializes in commercial leasing. Again, the person who drafted your will should likely not be the person who helps you with your commercial lease. Use a legal specialist. This person should spend at least 50% of their time practicing commercial leasing law, and again, your leasing agent will be able to help you with some good references. I think this is probably a good time to point something out. Your broker is representing you and acting in your best interests. When you retain your lawyer, they’re advocating on your behalf too.
But, I think it’s really important to understand the incentives that each of those two advisors have. Your broker is incented to get a deal done because that’s the only way they get paid. Your lawyer works generally hourly, and whether the deal gets done or not, they’re there to safeguard your interests. So just keep that in mind as you navigate those relationships, incentives are different between or among the people that you’re retaining.
The third critical advisor is a space planner. I’d say you can engage a specialist, or if it’s a really small space, your agent. Good, capable, commercial brokers could probably help you, particularly if it’s a small office, actually do the space planning with you. For larger or more complicated spaces, you’d need a professional space planner to lay out your space and help you determine the square feet required. You might even want to hire a space planner when you’re figuring out your needs and trying to break out space by component, private offices, versus bullpen, versus shared desks. That might be helpful to engage that person at that time also.
So I know you’re probably thinking, “Wow, I’ve got to go hire all these outside people, and it’s going to be expensive.” And the reality is, it is. It is pretty expensive. But the exercise is worth every penny spent, just from a pure risk management perspective for your organization. They specialize in these activities and they’d be able to identify exposures and risks that a typical tenant would easily miss. Good planners, lawyers, and brokers can help effectively level the playing field because you can certainly bet that the landlord you’re working with is likely sophisticated. They should be, because real estate is their core business. So using the golf analogy, if you’re going to go on that golf course every three, five, seven years, you can bet that your landlord’s probably on the course every day, so you need to find some way to close that skill gap.
4. Be mindful as you negotiate your lease and prepare for occupation
The fourth idea that I want to discuss today, and it’s the fourth step in the leasing process, centres around being mindful as you negotiate your lease, and as you prepare for the occupancy of your unit. As I mentioned, you’ll need the assistance of a lawyer to review all lease documentation prior to signing. This includes an ATL, which stands for agreement to lease, or an LOI, which is a letter or interest. These are often legally binding, so they’re short form documents, but they can bind you and your organization into that contract. Some people miss that, because you still have to negotiate and sign a long form lease after you sign that binding ATL or LOI.
So an ATL essentially comprises all the financial and legal terms at a high-level summary. The broker needs to assist you on negotiating the financial terms. They like to try and help you with some of the legal terms sometimes, but I think you’re going to really need your lawyer to help you negotiate those important legal terms. Negotiating the ATL is almost always a prerequisite. Sometimes commercial landlords will go straight to lease, but other times, they want that short form signed so that they can begin preparations. If a tenant executes one of those, like an ATL or an LOI, and it’s binding, without the consideration of all the terms, their lawyer may not be able to correct the issues at lease negotiation times.
I want to stress this. This is one of the biggest pitfalls I see tenants make. They rush. They’re excited. They’re working with their broker. They sign a binding ATL or LOI. Then they engage their lawyer, and then it’s too late in the process because you’ve already agreed to a number of things that you won’t be able to change later, no matter how talented the lawyer is that you’ve selected.
I also mentioned earlier that one of the specialist you could hire is an urban planner. I hire planners, I’d urge tenants to hire planners. If you want to narrow the number of consultants that you’re using, you could use a lawyer to help you determine whether the zoning allows for your particular use before you execute the lease. I will say this seems minor and trivial, but this is a very important thing to do, make sure that you can actually operate your organization or your nonprofit in the space that you’re leasing, because some uses aren’t permitted everywhere.
I’ve actually seen this happen before. Tenants negotiated an ATL, signed a lease, gave a deposit, got the keys, and then realized they actually didn’t have the right to operate their business in the location they just leased, and it nearly bankrupted them, because they didn’t take the time to hire the right specialist and complete the appropriate diligence.
Another area I’d like to caution you about is when you’re negotiating the lease deal, there’s so much focus on the actual face rate, or the dollar value of the rent, and that’s important obviously because it plays into your budget. But there are other terms of a lease that can be equally important. I want to take a couple of minutes to highlight some of them, like securing free rent from the landlord, and asking for tenant inducement allowances, those are really critical. Landlords set aside money and time in terms of free rent for tenants to take possession of their space, move in, fixture it, get settled. You want to try and secure as much free rent upfront as you can. Your broker should be helping you with that, as well as asking for a tenant inducement allowance that’s commensurate with the type of space you’re occupying.
The third thing to focus on in addition to the actual level of rent is thinking through: Do I have sufficient renewal options? If I want to stay and need to stay in this location beyond my initial term, I have to ensure I have those renewal options at my disposal. The fourth and the fifth thing to consider here, they’re more defensive in nature. They’re more risk-mitigating factors. Depending on the leverage you think you have as a tenant, if you’re leasing a lot of space in the centre, and you happen to be a significant tenant there, it’s always prudent to try and negotiate an option to terminate your lease.
Now of course, if the landlord’s position is strong, or you are a small tenant compared to most of the others, the landlord’s likely going to resist, but it’s always nice to have that in mind. Finally, you have to ensure your ability to assign and sublease your space. This is a must in case your organization’s financial or operating situation changes. I see tenants take space 12, 24, 36 months later into a five- or a seven-year deal, they realize they’ve outgrown the space. If they didn’t have the right to assign the space or sublease the space to another tenant, they’d be effectively paying for two spaces because they’ve outgrown their initial lease space.
Once the negotiation is actually complete and you’ve executed the lease, you need to move immediately to begin preparations for your space, engaging an architect if you need one, designer, contractor to help you prepare drawings and make permit submissions to municipalities. All that can take a really long time. Ideally, you want to obtain your permits before your lease commencement date actually begins. So you’ve identified your space needs, you have figured out the people that you’d like to work with. You negotiated your lease deal. Now you’re at the final step in the process, which centres around the period after occupancy.
5. Don’t forget about the time after you take occupancy and your ongoing obligations
Once you take possession, you’ve got to make sure you use your free rent period efficiently. Tenants usually underestimate the time it takes to have all those drawings and permits, as I mentioned, put in place. All the planning, designing, and engineering, all that stuff needs to happen then, so that when you get possession, you can purely focus on the free rent period and completing your actual tenant fit out during that free rent period. I’ve seen a tenant, I actually had a tenant where we provided four months of gross free rent, in which to fit out their storefront was actually very reasonable. They dragged their feet, dawdled, and mismanaged their time, and barely got their permits and applications submitted just before the end of the four months.
By the time those permits get reviewed and the municipality turns around, you could be four, six, eight weeks, and so now they’re paying rent and they’re not even in the space. They haven’t even fitted out their space. Then they stumble. They hit some issues with ordering equipment because of supply chain issues. They literally wasted almost an entire year of rent before they were actually able to finalize fitting out their space and moved in, and were able to operate. So you’ve got to treat every day like it’s costing you money, because it really is.
Once you’ve completed the fit out, free rent periods are done, and you’re kind of in the space, you’re comfortably settled into your space, I think it’s important to create an executive summary of your lease agreement. So it’s a short form explanation of all the relevant lease terms. The summary’s going to lay out all your most important financial terms, and all of your most important non-financial terms. It’s going to allow your contract admin team, or if you don’t have one, your accounting team, to diarize important dates and obligations.
As we finish this last process, I just want to take a few minutes here and identify some of the financial terms you’re going to want to summarize and keep close so that you can reference them when you need them. First is the lease start and end dates, pretty basic stuff. You’re going to want to figure out your lease obligations and you want to communicate that to your accounting team. That’s both the rates and the square feet. Or if it’s a gross lease, you want to figure out what your monthly rental amount is. You want to diarize your rent escalations and the rates because often you’ll sign a lease form, and there are escalations baked in. Landlords want to ensure that their lease rates are keeping up with inflation. In today’s world, that’s very, very difficult to do given where inflation’s at.
But you’re generally going to see lease rates escalate somewhere between 1% and 3% per annum, assuming your landlord has negotiated that. So you want to make sure you’re ready for those and that on those dates, your lease payments automatically increase so that you’re not in default of your lease. Additionally, I think you’re going to need to diarize the number of renewals and extension options you have, but more importantly, the dates by which these options need to be exercised. I’m going to give you an example a little later to illustrate why this one is so critical.
Some of the non-financial obligations, that includes dates for delivering certificates of insurance, copies of drawings and permits, perhaps gross revenue reports if that’s something that your landlord negotiated and you’re in that space, you’re renting retail space. You also need to think through timelines for performing HVAC, fire and life safety inspections. But why are these important? They’re important because you don’t want to default on non-financial items either. Often leases will have rights that might be no longer enforced because you actually went into some sort of default. So it’s important to capture not just the financial elements of the lease, but the non-financial obligations and diarize those.
Once your summary’s complete and all the obligations and dates have been diarized, you can of course begin to enjoy a space with your team and your stakeholders. That’s exactly why you wanted the space in the first place. But I will say as time passes, your lease term maturity is going to sneak up on you. So as I mentioned earlier, you’ve got to make sure you start your renewal process early. Set a calendar reminder one year in advance. You have to ensure that you don’t miss your renewal windows. Big dollars can be at stake. You also have to ensure that you’re actually submitting your renewal documents in the format that specified in the lease to the notice address specifically in the lease, because you don’t want to miss out on a technicality.
I want to give you an example because I’ve seen this firsthand. I don’t want to end on a really kind of sad note here, but I’ve seen firsthand a major multinational manufacturer that invested tens of millions, over $50 million in a manufacturing facility. Their dedicated real estate group forgot to exercise their option to renew. It cost them millions of dollars in rent increases because in the original lease they had negotiated had pre-negotiated rent escalations. Once you miss that window to exercise, your lease comes due at the end of the term, and it’s no longer in force and effect. So they had to renegotiate with their landlord a renewal, or frankly, a new lease, or an extension of their existing lease, and they lost all leverage because: even if they could re outfit another plant and spend the $50 million all over again, would they have had the time do to it?
Or would they have incurred significant business interruption? So I hate to end on that note, but in conclusion, I’d like to thank you. I’d like to thank you for listening to my thoughts on the steps of the commercial leasing process. I hope it’s been helpful. I also want to finish my discussion today with some recognition for my team at Lexington. I want to thank Raza, Zeeshan, Kevin, Kathy, and Matt, my broker, for providing feedback on the content and helping prepare the slides we used today. I appreciate everybody’s help.
So I believe I’m supposed to be turning it back over to Elizabeth, where there may be some questions that we can answer in the chat. Again, really appreciate the time that everyone’s taken today to listen to this, and I hope it’s been beneficial.
Elizabeth McIsaac: That was terrific. I just learned so much in 25 minutes, so thank you, George, and to the whole team that you had working on pulling that together because it was so comprehensive and thoughtful. We do already have one question in the queue, and I would just remind participants that if you have a question, the Q and A box at the bottom is where you put the question. That’s where I’ll be looking for questions, not on the chat room. But before I go to the question that’s in the queue, I want to go back to your fourth slide. The last point you made on it, you didn’t speak to it, was don’t negotiate for the sake of negotiating. Start this relationship off on the right foot. I wonder if you can comment at all. Are there guardrails around what is too much negotiating? What is pushing too hard? I know it’s an art, probably you rely primarily on your broker for guidance on this. But is there anything that you want to sort of comment on around that?
George Georghiades: As a tenant or the landlord, you have to be self-aware. You’ve got to understand what you bring to the table. If you’re Walmart, you have the ability to pretty much negotiate any term you like. And a landlord will swoon over you. If you are a 1,000-square-foot occupant in a 250,000-square-foot centre, you pick your battles. You’re going to pick the very few items that you need to feel comfortable in negotiating. And I think it’s really that simple. It’s be self-aware and understand what leverage you have as you enter these negotiations, and that’ll determine it.
Tenants that frankly aren’t self-aware, and they think they’re the anchor, yet they perhaps are far from it, and want to negotiate every term, often landlords would get kind of tired of dealing with them. I hate to say that. And it’ll probably just end the negotiations there.
Elizabeth McIsaac: I just got a question from my own team that said, “You mentioned a checklist that you put together for the session.” Are you able to share that or comment on that a bit?
George Georghiades: Absolutely, we can share that. I thanked a number of people at the end. They’re on my team, and they put that checklist together. I think it’s really important that as you go through this, think about the dollar value and the magnitude of the lease. The longer it is … I look at contracts and I think, “Okay. What’s the severity of these things? What will it cost me? And how long will it run?” If it’s a six month contract and it’s for a couple thousand dollars, I probably don’t get fussed about it. But leasing, particularly mid to longer term leases recur annually, and so the cost and the repercussions of getting into the wrong deal will just continue to recur and recur.
And so why do I say this? I say this because you should treat it like the diligence of anything else that you do. Take it with severity. And I think that checklist, as comprehensive as it is, I think we could probably still add some more to it to make it even more comprehensive. But treat it very seriously and do your due diligence. And make sure you’ve chased down kind of all elements before you dive in.
Elizabeth McIsaac: Great. So to the Q and A box. At what stage should you hire the urban planner and the space planner? And there’s a couple of extra questions. Are all the specialists needed to work at the same time as a team? Do they connect? Do you coordinate it? And is it different in every case? I added: Is this different in every case?
George Georghiades: Yeah. I mean, I think it is different in every case. I don’t think you need an urban planner if you’re looking for plain office space and you’re leasing in an office building, and you know that you don’t have any other activity or other uses happening in that space, you’re probably good with getting confirmation, getting your broker to get confirmation directly from the municipality that your use is acceptable there. Before you sign an agreement to lease, your lawyer probably will confirm. And you probably don’t need an urban planner.
But with respect to space planning, again, it depends. If it’s a large complicated space, you’re going to need a space planner. If it’s a smaller office location that you’re seeking, perhaps … One of the things I didn’t mention and I probably should’ve as I reflect on it now, is one of the things you could do is try and find ready built office space that’s suitable to you, so you actually don’t need to do any of that fit out. You don’t need to kind of wreck and rebuild if you’re going to assume a space that you think is very suitable that some other organization has left behind.
In those scenarios, you wouldn’t need a space planner either. Would you have your broker communicate with your planner and your space planner and your lawyer? Absolutely, you can. It depends on how involved you need to be. But I will say because of the severity and the long-term nature of the contract, and how much of your organization’s budget it consumes, I think you want to hear feedback directly from each of your advisors, and don’t let someone else quarterback your advisors for you. Hear directly from each of them. You can very easily have a Zoom call with all of them on, or the ones that you particularly need at any moment.
Elizabeth McIsaac: I think when you were talking about sort of the expert team that you want to build around yourself, obviously that’s going to be particular to the needs that you have. I think you said you’re going to look for them. Is your broker a good source of referrals for things like space planners and urban planners, and to sort of help you identify that expertise? Or do you seek that elsewhere? How do you seek that stuff out?
George Georghiades: I think your broker can refer you to those folks. I think your broker can absolutely refer you to the right space planner. And if you needed an urban planner to get through zoning issues or permitted use issues, they can absolutely introduce you to those folks. They can even give you referrals for lawyers. But a referral is just that, I think you need to do your own diligence. And there’s a reason why I said you want to hire a specialist. Commercial leasing, it’s a very, very specialized area. And a generalist, will they do probably an okay job? Yeah, they might. But there are a lot of things that a generalist lawyer is going to miss. And so you’re going to want to do your diligence on them directly.
I actually think having the right lawyer that is deal oriented, meaning they’re not in it just to kill the deal, they’re really in it to protect you and make that deal happen. They’re, I believe, the most important person on your side because they’re your one man or one woman risk management team.
Elizabeth McIsaac: Good point. You referenced a faith-based organization subleasing space for occasional weekend use, evenings. I thought this was a really interesting element that you talked about, this sort of hybrid use. I think increasingly as organizations are beginning to shift how they’re doing their work and how often people come in, this is more of a reality. What about two organizations on a hybrid format sharing it, sharing the lease maybe, using the same office space on different days? Are you seeing direction in the market going here? What are the pros and cons of having a joint split shared lease? Does one become the primary? Are there sublet? How are you seeing some of this play out?
George Georghiades: I think you’re referencing shared office space. Right? There’s WeWork, or some of the others, Regus is out there in the marketplace doing that. They have a very different model. They kind of wholesale their office space that they lease, and then they break it up and retail it out to smaller players. But if you wanted to kind of do this more organically with just another organization that you think shares values with you, and you’d be comfortable working with them, I think it’s a great idea. I think the landlord is probably going to want both organizations to be on that lease, and they’ll probably want them to be joint and several, which means that you’re both responsible for the entire amount, regardless of who pays and who doesn’t.
So you need to think through those things. That’s where I think finding good legal advice is really important if you’re going to venture into that shared territory. I think if you can make it work and you can figure out the risk mitigation strategy appropriately, I think it’s a smart idea. You can probably even share reception. You can share certain common area items. If you’re splitting it up in terms of days, you can pro rata share your days. You can make it work. It is complicated, but you’ve got to just have very clear and set boundaries, and abide … Personally, never been a landlord in that scenario yet. I’ve leased to an organization that then subleased to another, so my tenant is kind of the original tenant.
Elizabeth McIsaac: Great. Someone asks, “Do you have any suggestions about what to consider when renewing a lease that’s expiring later next year?” Does the checklist change? What are the considerations?
George Georghiades: Well, when you say later next year, so we’re close to the end of 2022, so you’re basically saying end of 2023, your lease is coming due, and you’re thinking about it. And I think your lease document probably says you can’t renew, the earliest you could renew, I’m guessing, is somewhere between 12 months or nine months, and the latest is six months before your expiry date. That’s typically what most commercial leases will say. And my advice to you is go to your landlord now. Don’t exercise your option. But say, “Hey, we’re starting to think about what we’re going to do next year, and our space needs. And we’re uncertain about them. And I’m wondering if we were to stay, what would that look like?” And try and get a rental rate from them if it’s not already predetermined in your lease agreement.
And maybe even ask what type of tenant inducement would the landlord consider if I stayed. Now again, you’ve got to be self-aware about your situation as to whether you have leverage and whether you think the landlord … Maybe the landlord has a lot of vacancy, and they very much want to keep you there. And so I think you’re going to want to think through those, but start early. And there’s nothing wrong with asking, “If we were to stay, what would it look like?” And that gives you a good reference as to whether you’d be happy with that outcome, or whether you should start searching somewhere else.
If your landlord wanted to increase your rent 20% or 30%, because that’s where market is, you might actively choose to go somewhere else. Why not know early so that you don’t use your leverage negotiating that new lease in that new location?
Elizabeth McIsaac: Excellent point. A lot of what you’ve talked about comes through having a good broker or real estate agent as sort of that person that’s going to really guide you through this. How do you pick that person? What are you looking for? How do you know you’re getting a good deal from them? What should your expectations be? What does that process of picking the person look like?
George Georghiades: I think you want to go to a brokerage that has got a good reputation. There are some national and international brokerages out there, and there are some regional ones. And it doesn’t mean that the bigger ones are better than the regional ones. Really, that’s not what it’s about. It’s about the individual. I select my broker based on whether I truly believe I can trust them. It’s a trust based relationship because they’re advocating on your behalf. And half the time, you’re not even there. You don’t know how they’re representing you and what they’re saying. And so I think the most important thing to do there is find someone that’s trustworthy. And I think having a positive reference from someone else that’s gone through the experience and who was happy with the outcome referring that person is great.
But again, it doesn’t absolve you from doing your own diligence. Interview the specific agent that you’re going to be working with and ask them how many deals they’ve done, and how much … Are they specialized in just commercial leasing, or do they do sales? And what percentage of their business is sales versus leasing? And what type of leasing transactions? I was on the phone the other day with my broker, and we were just talking about how many deals he’d completed this year. And so I know that, and I know … I didn’t go into which ones were retail and which ones were office, but those are questions you can ask. And I think it’s important you find a specialist, but at the end of the day, it’s all about trust.
Elizabeth McIsaac: You can ask for references.
George Georghiades: Yes.
Elizabeth McIsaac: Absolutely. Somebody asks if you have any recommendations if you’re dealing with a new landlord who has never rented before, and if not using a broker. So perhaps you’ve got less capacity on that side of the table.
George Georghiades: You know what, I’m sorry, I just realized I didn’t answer the last question fully. I think they asked about cost, about fees. How do you know you’re getting the right…?
Elizabeth McIsaac: A good deal.
George Georghiades: I think the answer is the landlord goes out generally and gets their own broker. That’s generally the way it works. You can use that broker, and that broker can represent both.
Elizabeth McIsaac: Really?
George Georghiades: Yes. But I advise you to get your own broker and have them purely advocate for you. In that scenario, the landlord pays all the fees. You don’t pay a fee for your broker at all. The landlord pays the listing broker, the listing broker then takes a portion of that fee and pays the cooperating broker. The cooperating broker would be your broker. So it doesn’t really cost you anything. But like I said, it doesn’t mean that you can just select anyone. Do your diligence, get your right references, interview the person yourself. Get comfortable that you can trust them. But yeah, you’re actually not paying them.
Elizabeth McIsaac: Okay. That’s an important point. And so then to the next question, which is: If you’re dealing with a new landlord who’s not using a broker, perhaps is a bit greener on that side of the table, are there any recommendations about managing that?
George Georghiades: Well, the first question that pops into my mind is if that landlord’s not … If they aren’t using a broker, will they pay for yours? Right? Or will you have to be paying that broker? So if they’re not, then it becomes difficult. I actually haven’t seen that scenario very often, but I guess you could in theory avoid brokers altogether in that scenario, if they’re unprepared to pay your broker to lease the space. But again, you would then probably want to move to negotiating an agreement to lease or a lease with your lawyer directly with the landlord or the landlord’s lawyer.
Elizabeth McIsaac: Okay. Our audience are nonprofit organizations, and you’ve given examples from both for profit, very multinational corporations and their deals. Are landlords more amenable to negotiating with nonprofits? Is that part of what can be in the negotiating space?
George Georghiades: I think the answer, like most things in life, is that it depends. It really depends on the landlord’s ESG strategy. Right? They might have a particular affinity to a certain cause, and they would be willing to look at your tenancy very differently than they would a for profit tenancy. In my portfolio, from my own personal experience, I tend to charge nonprofits market rent. And what we would do though, recognizing that they’re doing amazing work for the community, is that we would then take a portion of that rent and donate it back to them. And that allows us to maintain our market rents for the building, and of course, if we ever had to finance or do any financing, the rents are in place. But I’ve done that a number of times with not for profit, or a variety of charities that we lease space to.
Elizabeth McIsaac: Great. We have time, there’s one last question, and then I think we’re out of time. This is a very specific one, and you may or may not have an answer for it. Regarding specialists, we’re negotiating with a developer that has purchased a church and wants us to create a performance space in the sanctuary. We’re seeking someone familiar with leases with developers for this very unique situation. Are there any suggestions? And if not specific suggestions, how do you go about finding that kind of expertise?
George Georghiades: So Elizabeth, can you clarify? What specific expertise are we looking for?
Elizabeth McIsaac: Someone familiar with leases with developers, I guess for space that’s being created for specific purpose, so I guess that’s all I’ve got from the question that’s written down.
George Georghiades: Okay. Well, yeah, often you can lease space that’s already built, and you can go in there and kind of kick the tires so to speak, and walk through the space and get to really understand what it looks like. But I’ve often leased space to people in advance, to tenants in advance, where the building isn’t even there. You stand there and it’s an empty field, and you’d lease the space. Now those lease agreements are trickier and they’re more challenging. And frankly, all the more reason why you need the absolute best specialist in that scenario because there are so many unknowns, and you need to account for so many things.
I can give you a couple of examples to think about. You have to ensure the handoff between what the developer is going to give you. What’s the condition of the space they’re going to hand you when they’re done building what it is they’re building? That’s one, and that’s really important. Will it have an HVAC unit? Will the floor be level? Will the walls be completed and primed and ready for your tenant paint? So setting up what the landlord’s work looks like and the condition in which you’re going to receive the unit, critical in this scenario.
But of course, we all know and we’ve all experienced construction projects never get completed on time or on budget. You want to ensure you’ve got rolling start dates on that space. But look, I think in this scenario, I’ll never be able to explain all the things you need to think about. But like I say, the right broker that is used to doing these types of greenfield, or major renovation, or repurposing projects, and the right commercial leasing lawyer will be your savior in this case. You need them.
Elizabeth McIsaac: So do the homework and find the right expertise.
George Georghiades: Yes.
Elizabeth McIsaac: Right. George, this has been incredible. I have learned so much. Most of my real estate or building things have been very limited, so my world has just expanded, and I feel like I want to go out and find new space, kind of, not really. I want to thank you and your entire team for pulling this together, incredibly informative, and it will live well on our website. I want to also thank our audience for joining us today. I know that everyone is busy, and so I really appreciate the time that you’ve taken to be with us.
George leads and oversees Lexington Park’s team of investment, asset management, and development professionals. Prior to co-founding Lexington Park, George held progressively senior roles at McKinsey & Company, serving both its Private Equity and Institutional Investor Practice and providing guidance on a wide range of issues related to alternative asset class investing, specifically real estate and private equity. A Loran Scholar from the Class of 1995, George was the first alumnus to serve on the board of the Loran Scholars Foundation. He has also served as Board Treasurer for the Design Exchange, Canada’s Design Museum. He holds a BA in Business Administration from the Richard Ivey School of Business at the University of Western Ontario, an MSc. in Real Estate Economics and Finance at the London School of Economics, and an MPA from the Harvard Kennedy School at Harvard University.