How to Plan for More Office Space - ROFO vs. ROFR

How to Plan for More Office Space

If You Plan to Grow, Know the Difference Between ROFO and ROFR in Your Lease Now

If you intend on growing your company, there are several ways of ensuring that you can expand your operation in the same building. You don’t want to find yourself trying to grow your operations in a building with little space to spare. Here are some ways you can make sure you will have additional space when you need it:

Right of First Offer (ROFO) 

A ROFO lease term is agreed upon between you and the property owner when you execute your original lease. The term includes the amount and location of the additional space and the rent that you would pay if you took it. If the specified extra space becomes available, the property owner must offer it to you first before accepting an offer from another business. If you do not act by the deadline specified in your lease, the offer is rescinded, and the property owner is free to lease the space to someone else. 

 

Right of First Refusal (ROFR)

You may consider adding a ROFR lease term to your original lease if you plan to grow. This term specifies that if a property owner receives an offer from another business for a specified space, they have to share the offer with you. Again, you must act by the deadline specified in your lease: you can either accept it with the same terms the other business offered or refuse it. If you refuse the space, the property owner can lease it to the other business. 

 

Which Term Should I Use?

First off, always engage a tenant broker to help you craft a lease. They will not only know about which terms to include in it, but they will also know the market fundamentals such as whether rents are rising or falling. For example, if rental rates are rising, they may advise you to include a ROFO term that locks in the future space at the current rental rate. If rents are falling, your broker may suggest a ROFR term, which may allow you to secure additional space at a lower rental rate. 

 

Banking Space

This practice is typically found in larger metros where the rents are rising quickly. It’s referred to as “shadow space”, that is, space that’s leased but not occupied. If you will be expanding your business in the immediate future, you may want to secure the additional space despite not having an immediate need for it. Obviously, this is a risky proposition should business conditions change, and you are forced to reduce your headcount. Of course, if your space is configured right, you could sublease the unused space that you no longer need – your requested rental rate could be below the current market rate and rent quickly. There are also contraction clauses you could negotiate on the outset, but property owners are loath to grant them. 

 

The Property Owner Might Not Bite

If the market where you are trying to lease has low vacancy, your property owner may not agree to a ROFO or ROFR lease term. They might want to be free to lease space in their building anytime they want without having to deal with you. Of course, if you want to bank the additional space, the property owner will be elated! Again, work with a broker you trust to help ensure you have an option in place so you can increase your square footage in the future.

 

Sam Devorris is the Los Angeles commercial real estate subject matter expert and broker for Truss, a commercial leasing marketplace – www.truss.co– that features complete price transparency and 3D virtual tours of coworking and direct spaces available for lease. You can reach him at sam@truss.co

 

 

 

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