Top 10 Lease Mistakes - Part I
When do most executives
think about their office lease?
Usually when it is about to expire!
Most of the Hardest Lessons are Learned through Mistakes
Entrepreneurs and business owners have a lot on their plate between managing finances, staffing, production and operations, the list goes on. While juggling these day-to-day activities, one task often gets deprioritized – the renewal of the office lease. By the time the lease makes its way up to the top of the to-do list, it is often so close to the expiration date the business owner (Tenant) signs whatever renewal offer is proposed by the Landlord. Making matters worse, they find themselves in the same boat every three to ten years: the lease is up, and someone must deal with it.
Unfortunately, since most Tenants will only negotiate a handful of office leases during their career, achieving a certain level of competence is very difficult. Often the hardest lessons are learned through mistakes – mistakes that can cost a business thousands of dollars. Many Tenants approach the lease process ill-equipped and behind the curve. Below is a list of mistakes that are commonly made in the site selection and lease negotiation process.
1. Not allowing enough time and resources for the process
Once a business finds a place that suits their needs, the thought of relocating is daunting and often avoided at all costs. However, even if relocating is not desirable, it is still important to look at relocation options to provide leverage when negotiating with a business’ current landlord.
This relocation process typically requires 8-9 months, beginning with the assessment and evaluation stages of the process, which alone can take up to 5-6 months. Once the space that best suits the needs of the company has been identified, finalizing negotiations with the Landlord on the letter of intent can take another 2-4 weeks. Additionally, it is exceedingly rare to find space that meets all your specifications and needs “as is”, thus, any new space requires build-out. Resultantly, architectural plans will need to be developed and approved, construction documents must be started and building permits will need to be obtained. After the approval of all paperwork, the remodeling of the space can begin which can take 1-3 months depending on the requirement.
If a Tenant does not look at their lease renewal until a few months before the expiration, the Landlord knows that the tenant does not have time to find relocation options – the Tenant owner just lost leverage.
2. Beginning a Space Search Without Determining the Short-Term and Long-Term Needs and Goals
A Tenant’s FIRST STEP in the determining business/office space needs is to analyze their current space (possibly with the help of a space planner). A Tenant must first determine if their current space could be better utilized, or if they need to find more suitable space. To do this, the business owner should have a sound knowledge of the business’ square footage requirements, employee and departmental interaction, communication and technology needs, and future growth projections. Other considerations for the business owner include image, proximity to labor base, proximity to airports and/or train stations, etc.
3. Using the Wrong Broker, or No Broker At All
Unless a business employs an expert in commercial real estate, most do not have the time or the resources to stay abreast of market trends, current real estate issues and law revisions. Seeking professional support on something as vital as office space is important. However, many will attempt the process unassisted and will deal directly with the Listing Agents of the prospective buildings –BIG MISTAKE! Listing Agents work for the Landlord and their first goal is to get the best deal for the building. Get Representation! A good Tenant Representative can counterbalance the Landlord’s team of experts. However, you should select the right broker for your space needs. A common mistake Tenants will make is hiring a broker outside of his or her expertise – for example they’ll hire an office broker for an industrial move. Commercial real estate is highly specialized and is commonly segmented into three categories: office, industrial & retail. Each type is distinctly different and will require specific expertise.
4. Beware of “as-is” Property
Finding “as-is” property that suits your needs will be very challenging. However, if you do, it is essential that you require the Landlord to guarantee that the space is up to current building, fire, safety, zoning and ADA codes. The Landlord should also agree to guarantee the condition of the electrical, plumbing, heating and air-conditioning systems for the first 60-90 days (or the entire term of the lease if possible.)
5. Not Using Architects and General Contractors Under Your Control
Landlords often have architects and general contractors with whom they have established relationships. Because of the previous relationship, they usually encourage tenants to use those professionals - for a price. The Landlord will charge a project management fee of up to 4% of the total construction cost. Sometimes it is in the Tenant's best interest to use the Landlord's relationships, but an experienced broker can help negotiate that management fee.
Additionally, by allowing Landlords to use their own architects and general contractors, you will likely lose the ability to control the design of your space, as well as the ability to maximize the up-fit allowance (or Tenant Improvement Allowance) provided by the Landlord. Negotiating an up-fit allowance is an important piece of lease negotiation and can be a huge financial benefit to the Tenant. If the Landlord takes control of the build-out of the Tenant's space by using established professional relationships, the Landlord has no incentive to manage costs or to bid out projects, supplies or labor. The Landlord's financial obligation is capped at the allowance negotiated into the lease - any overage will be passed directly to the Tenant. If the Tenant uses their own professionals, a cohesive team can be established early in the process - a team working on the behalf of the Tenant.
