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. Last Updated: 07/27/2016

How to Go About Getting a Better Office Lease

Why would a U.S. multinational pay $730 per square meter (plus operating expenses) for lower tier class A office space, when they could be renting the space for $500 a square meter, including operating expenses?

Because it forgot that its leasing contract contained an extension clause under which the lease would be automatically renewed for five years unless the landlord was notified otherwise.

While the firm above - which is eager to remain anonymous for obvious reasons - is one of the more dramatic examples, it is certainly not the only company with a landlord-friendly contract unable to take full advantage of the rock-bottom rents in Russia's crisis-riddled market. A handful of other international companies have also had the bad luck of forgetting they had automatic extensions in their contracts, and many others just fail to get the best deal possible - usually because they do not know how, according to real estate experts.

"You can have two tenants in the same building whose total costs vary by 30 percent to 35 percent, and both of those tenants have renegotiated [leases] in the last six months," said Jack Kelleher, director at Noble Gibbons/CB Richard Ellis.

The logical question then is: Can a tenant negotiate his own deal or should he get an adviser?

"Yes, you can, but I doubt that the results would be the same," said Michael Lange, a partner at Jones Lang LaSalle. "Knowledge of the market is absolutely essential to get the maximum results."

To get the best deal on a new lease, a tenant willing to take the leap on his own should first look at the market and see what deals are on offer, said Martijn Kramer, head of real estate consulting at Arthur Andersen. He should be ready to move if he can get a better deal than what is being offered in his building.

Then, the tenant should go to the landlord and say he wants a different arrangement on the new lease, pointing out that if the company leaves, the space will probably be vacant for some time as the owner hunts for another tenant.

"It is better to have the tenant stay than to have to look for a new tenant," Kramer said.

The tenant should try to get the rent down as low as possible. Fitted out class A space is currently going for between $425 and $525 a square meter.

"There may be some psychological minimum below which the landlord doesn't want to go," Kramer said. "[If so,] try to get other things instead."

For example, a tenant can try for a reduction in rent based on a recalculation of the size of his office space.

"Ask how much of this measured space is usable - ask how it is calculated," Kelleher said.

Space in Moscow is measured in many different ways - even though most owners insist their method conforms to international norms. An observant tenant can often get the calculated amount of rented space knocked down.

"Try to procure the best information possible and measure the space yourself, and then confirm independently with an adviser," Kelleher said.

By recalculating its office space, one Western company saved $600,000 over its five-year lease, he said.

Also, a tenant can press for the landlord to include operating expenses in gross rent. Prior to the August 1998 crisis, operating expenses were always listed separately and averaged from $90 to $140 per square meter a year.

Tenants must be alert, though, that operating expenses may not reflect the actual costs, real estate advisers said. Companies have found out later that quoted expenses did not include costly managers' fees and 20 percent value-added taxation, items which they had assumed would be part of the package.

"You don't always get the comprehensive list of services and costs required to run the building," Kelleher said. "Often [tenants] don't discover the hidden costs until they are well into their lease."

Another hidden cost can be utilities such as electric or air conditioning. For example, one major foreign bank was delayed two years in moving into its new offices because it had failed to calculate that the building did not have sufficient electricity capacity, he said.

Getting operational expenses included in the base rent can be beneficial for the client not only because it eliminates an additional fee, but because it also helps the tenant avoid the risk of operating costs increasing, advisers said.

If the landlord does not want to drop the rent any further, a tenant can also ask for owner-paid renovations, rent holidays and free parking.

In negotiating the new lease, a tenant should also pay attention to the length of the contract - a factor that completely depends on each organization's individual situation. "If the tenant doesn't know where his organization will be in a year or two he can get a shorter lease - but if the market goes up it will cost the tenant when the lease expires," Kramer said.

Finally, a tenant must read all the fine print in the new contract to make sure it includes everything that was agreed upon in negotiations with the landlord, experts said.


Average Lease Terms and Conditions

for prime office space in Moscow

Prior to Crisis Post Crisis

Lease Length 3-5 years 1-3 years

Base Rent $700-$850 sq.m/yr $425-$525 sq.m/yr

Service Charges $90-$140 sq.m/yr $90-$140 sq.m/yr (in some cases can be included in base rent)

Security Deposit 3-6 months 0-3 months

Prepaid Rent 3-12 months 3 months

Tenant Fit-Out $300-$600 sq.m Many properties are now offered fully fitted or built to suit, thus no additional costs should apply.

Value-Added Tax 20 percent on rent plus service charges

Parking Underground: $250-$400 per spot per month

Surface: $150-$350 per spot per month

- Jones Lang LaSalle Research