7 Deadly Sins of Leasing


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There are so many factors to consider when leasing commercial space. Don’t commit the 7 deadly sins!

 

1. Leasing without a strategy!   

There are several critical questions that need to be asked and the answers are as different as each individual business. The questions include size requirement, location objectives, and visibility, office layout (open, cubes, private offices, conference room; reception (large or small) and access to the space prior to lease commencement. Without a lease strategy, the tenant is likely to make critical mistakes in judgment.

After you’ve answered these basic questions the next step is to set a timelineWhat is a timeline? In its most basic sense, a timeline is a series of dates that give you targets to “hit” for specific activity, i.e., date to move in, date for which the lease reviews should be complete etc. How do you prepare a leasing timeline? Start at the end and work backwards.  For example, if your lease expires June 1, 2015; then you might decide that your decision about staying or relocating must be completed by Feb. 1, 2015; lease proposals must be submitted and reviewed; building tours completed. How do you know if you’ve allowed enough time? The more unique your requirements and the larger your space needs, the more time should be planned for each component of the timeline.

Why is this critical?  Without a realistic schedule of activity, time becomes your enemy, reducing your effective alternatives.  Landlords know this, often use stall tactics in getting you a proposal and use it to obtain higher rental rates. When you run decisions to the end of your lease term, there may not be enough time for your new space to be ready and you’ll face 175% – 200% charges for each month you stay in your current suites past the lease expiration date.

2. Focusing on the rental rate!

It’s a little like focusing on the car payment, rather than the total cost of the car. Demand to know the real cost of your options including the costs of moving, moving phone lines, cabling and so on!

Pass-throughs  All buildings cost money to operate and the efficiency of the building and the management team, ultimately affects your costs to do business at that location. Additionally, negotiating rental rate and ignoring pass-throughs and base years will often undo your hard work negotiating the rental rate.

Add-on factors  Most buildings have common area, which is a factor to offset their owner’s cost of maintaining space in the building that anyone may use, i.e., the restrooms, the hallways, the building entrances. Additionally, add-on factors make up the lost rent the landlord cannot charge for these common areas.

Construction Costs   Knowing that Building A is offering $10.00 a foot for build-out allowance; Building B is offering $12.00 a foot and Building C $15.00 doesn’t tell the whole story of construction costs that you may incur.

Turn-key or turkey? A turn-key build-out commitment from a Landlord usually means they will take care of the construction costs and not pass excess costs on to the tenant.

Concessions  What should I ask for and expect to get.  Free rent, early access, excellent renewal provisions, above standard finishes, roof access for antennae’s etc, are all concessions.  Knowing which ones are important to your company sets the stage for successful negotiations.  Each market place is different, for example, what you can get for a Class A office building in the northeast office market may be dramatically different than a similar building in the north central market, i.e., Hwy 281 north of Loop 410.

3. Don’t Get Professional help!

How many of you have been told you need professional help?   Why do we avoid it?  Fear?   Pride?

High risk behavior Clint Eastwood said, “A man’s got to know his limitations.”  It’s a good idea to acknowledge that you don’t have expertise at everything.

Avoiding attorney fees?  This is often high risk behavior.  There are some specific things a good real estate attorney can do to help get certain lease language adjusted to your favor.

What a broker can do for you!   In addition to many other things, a good broker can act as a shield to help you avoid, giving away too much; such as your “real” intentions about staying.  The broker helps you keep up your poker face.

Delegating is good business.  (Tyranny of the urgent)  It is wisdom to focus on your business that generates revenue and recruit suitable help!

4. Signing their Standard Lease agreement

Are you bilingual?  I mean some people know more than one language, but does that include the legalese found in today’s lease documents. When does “standard” not mean reasonable?  Your broker and attorney should help you object to the right things and not waste time fighting battles you cannot win.  What are some tenant risks?   The following list is not exhaustive.

  • Dramatic increases in operating costs.
  • Equitably resolve landlord’s failure to provide adequate air conditioning.
  • Need to expand. Do you need to have an option to expand into adjacent space, when it becomes vacant?  How should the notification and time of response be written?
  • Delays in getting the space ready.  How will this be handled?Certificate of occupancy.  Is this always necessary? No.
  • Your neighbors.  (Do they have any rights pertaining to your space in the future, who are they and what do they do.)
  • Default.  Not all leases are the same here.  This part of the lease tells how you can get in trouble and what remedies are available to the Landlord.
  • Insurance:   Some leases have unreasonable insurance requirements!

 

5. Entrust yourself to the Landlord’s broker!

What can you say? It’s always a good idea to be courteous and professional, but less is better. For example, if asked about your plans to renew your lease, you might say, “that’s a real possibility, but we’ll have our broker help us look at the market place to see about options.

Whose bread is getting buttered?  Remember the company whose name is on the outside lease sign represents the interest of the Landlord by law. The agent of that company is obligated to be concerned about achieving the Landlord’s objectives, not yours!

 

6. Don’t have legitimate options.

It takes an effort to find alternatives, sometimes a great deal of effort! Does your business have unique needs or non-standard requirements, such as a heavy power requirement or a yard? Banks need a place for drive through lanes; others must have first floor lobby space.

Playing from a strong hand. When you don’t really have many options, it’s more important than ever that your current Landlord not know this. Leverage can occur on the basis of attitude and inference.

 

7. Leasing without an exit strategy.

How do I get out of here? It’s easier to get in to space early than to leave early. The sublease clause becomes very important. Could the option to cancel be more important than the lowest rental rate?

Delays in occupancy? Can you void the lease if the Landlord fails to deliver the space on time?  

Pay attention to your own timeline. Construction delays attributed to the tenant could have you paying rent prior to occupancy.

Put your requests in writing. If you experience construction changes or problems get verbal commitments from the Landlord memorialized in writing. Some landlords need an incentive to avoid delays.

What if you don’t want to leave when the lease is over?  Renewal options are not automatic, but not all renewal options are helpful.

by: J Scott McMurrian

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