Given that a nonprofit organization’s facility costs are typically the second highest cost on its balance sheet (after staff), securing a good lease on the best office space should be a high priority.
Unfortunately, we’ve found that real estate costs and commitments are often not addressed in the best way. It’s easy to understand why: People who start and work for nonprofits have other areas of expertise. This can lead to an uncomfortable office environment at best or a dysfunctional operation at worst. It can also lead to financial hardship as unforeseen costs pile up and lengthy commitments hinder flexibility and progress toward long-term goals.
Here are some key steps that every organization should take as it moves forward with a new lease or lease renewal. There’s a lot to consider.
1. Have a plan.
Putting specific processes in place for acquiring or renewing leased space is critical to securing predictable real estate costs and a positive work environment. Understanding the time frames required is the first step, as getting an early start allows you the time to fully scour the market for options and deploy the leverage needed to negotiate a fair deal. When leasing space, a small organization of 2-10 employees can get by with a 3-6 month head start, while a larger group with up to 50 staff should start the process a full year ahead of time.
2. Get an expert on your side.
Engaging a commercial real estate agent that is familiar with nonprofits and works only for his/her clients’ interests is an important first step. Finding a tenant representative that is not a broker will greatly improve your odds for a successful long-term facility lease. Be sure to talk with a couple agents and get a feel for how they would assist you. When you consider that the landlord almost always pays the agent’s fee, there is really no reason not to hire someone to assist you and represent your interests.
3. Know your options.
Touring the market of available options should happen early if relocation is on the horizon. While a general rule of 200 square feet per employee can get you started, it is often best to consult with your tenant representative, architect or space planner. What types of amenities are important to your group? Shared conference rooms? Free parking? Nonprofits should consider their constituency, staff and budget when they search for an ideal location. Where are your stakeholders and partners located? Where does your staff live? What areas of town have properties that fit your budget? Do you plan on co-locating with other organizations? Again, a good tenant representative can help put together a matrix addressing these factors.
4. Make your offer and negotiate the details.
Writing an offer is the next step (for either a new lease or a renewal), and this is typically handled with a non-binding Letter of Intent. An LOI lists the business terms to be addressed in a lease and lays the groundwork for negotiations. Typical terms addressed in this document include:
- Occupancy, Lease and Rent start dates
- These dates are not always the same and careful attention should be paid to the difference.
- Premises size
- The actual area you occupy may be different from the area you pay rent on, so be sure you understand the difference.
- Lease length
- Is flexibility of most importance or is it important to lock in a long-term home and rent?
- Monthly rent and annual escalations
- Be sure you understand the market and your prospective landlord’s motivations.
- Operating expenses and how these are handled
- There are many different types of leases and some may be better than others for your organization. Understand the differences.
- Tenant Improvements needed and who pays for them.
- You will likely want to engage an architect and contractor prior to locking in a deal. Often times the landlord’s architect/contractor can provide a budget bid/space plan quickly and most effectively.
- Options to renew, expand, terminate and purchase
- A major reason to lease rather than own is the flexibility leasing offers. Be sure your lease is flexible by containing important options.
- Parking, signage, HVAC, co-tenancy, internet, subleasing and security
- There are many considerations associated with a property besides the financial points. Be sure to analyze these items, as they are typically what affect the day-to-day operation of a facility.
An alternative to the Letter of Intent would be a Request for Proposal. An RFP can address the same points as above but often, for larger organizations, provides for a better apples to apples comparison of the options and is a good tool to gain leverage for the negotiations. Remember that everything is negotiable and your team’s job is to prioritize the various deal points and push for those terms that are most important to you.
5. Sign the lease.
Once a non-binding deal has been agreed to, request a lease and have your legal counsel review it prior to signing. The lease is the binding document that dictates how your facility will function for the next 3-10 years, so be sure you understand the language in this document.
6. Move in.
If you are relocating, planning a move can be daunting. Be sure to request a move timeline from your commercial agent, furniture vendor or mover and get started planning right away. Depending upon your situation, this can be an organized month long process, or a weekend work ‘party’ at the last minute. By starting early (see above) you should have plenty of time to make an organized move a pleasant, team-building experience.
A nonprofit’s area of expertise is typically not commercial real estate, and with good reason. It’s important for you to know the basics of leasing office space so you can stay ahead of the process; beyond that, there are experts ready to step in as guides and advocates.
Take a look at your office. In so many ways, your space can work for or against your mission. Acting early, having a plan and engaging a representative will help you find a space and secure a lease that makes wise use of your donors’ contributions and sets your organization up for success.