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Our promise is helping you negotiate a better lease than you have in the past. We might even be able to help you renegotiate your current lease, and come out ahead.
4 Most Common Mistakes Tenants Make when Negotiating Their Lease
Why settle for a regular agent when you can get an expert in Commercial Real Estate Lease Negotiations and Commercial Lease Issues when major amounts of Your Money are at risk? Your lease is one of your top business expenses. We work hard to get you the best lease possible.
Most tenants make mistakes in the initial stages of a lease negotiation when rental rates are being established. And these mistakes come back to cost them later. Landlords are out to make profits and they rely on a lot more than leasing rates to accomplish this objective!
An unknowing or unsuspecting tenant is fair game, and most times easy prey to both landlords and their agents!
Ignoring the clauses in a lease can lead to serious consequences for your business, including lease termination and loss of personal assets.
Don't just negotiate the rent and then start signing documents...or you'll be sorry later if anything goes wrong. Anything can include change of ownership of the property you occupy. What can happen would take too long to explain here, so you'll have to call us to understand this better.
Another common mistake we see in leasing is tenants thinking they can hire an attorney later if they have a problem.
The best time to get a good broker and a good lawyer is before you execute the lease!
Our Industry estimates 90% of small tenants make no changes at all to a lease!
Landlords often spend lots of their own money on lawyers to make sure the leases they use work most heavily in their favor. At minimum, you should have your lease reviewed twice by a professional broker or lawyer.
One thing many tenants don't consider much when they sign a lease is the value of the lease.
Did you know that your Landlord can capitalize every dollar you pay as a tenant by 700% to 1900%?
Let's put the value of the lease that you are signing into financial perspective:
Our example uses a business owner that needs to lease 3,000 square feet. The cost to lease that space is $2.00 Absolute Net, for a total annual cost of $72,000. This does not include the cost of the proposed $ .43 per square foot that this tenant will have to pay in addition to the rent...another $15,480 per year to cover the building's operating expenses. The Landlord will do this so he can know exactly what his profit is before taxes. This is known as CFBT - Cash Flow Before Taxes.
However, the extra $ .43 cents per square foot makes the $72,000 Net Operating Income (NOI). Now NOI is used as a basis to value the property the tenant is leasing, based on evaluation by income approach. In other words, $72,000 is NOT actually $72,000. Yes...this is a world where 1 does not = 1!
If the current Capitalization Rate the market will bear is 7%, then the $72,000 in rent is perceived to have an appraised value of $1,028,571.43. Now let us ask you a question: do you as a tenant all of the sudden feel like you have more value? Your answer should be "YES". And if this scenario fits your situation, then your value in your mind should have just increased by 1428.57%.
Put differently, your Landlord is getting ready to sell his property. At the same time your lease is going to expire soon (soon is relative). The Landlord is going to start heavily focusing on current market rent. Let's say right now you're paying $1.00 per square foot. But Current Market Rent is $1.50. Maybe you've been where you are for awhile and so there is Upside in Your Rents.
Upside
Using a Market Capitalization Rate of 7% (Fair Enough in January of 2008), let's look at the difference in Your Landlord's suggested sales price based on a 7% capitalization of $1.00 PSF vs $1.50 PSF. And understand that you don't even have to sign the $1.50 PSF Price on Your Commercial Real Estate Lease yet for this to work.
A 7% Capitalization Rate (Assuming NNN) on $1.OO PSF would set the price to market at $171.36 PSF.
A 7% Capitalization Rate (Assuming NNN) on $1.50 PSF would set the price to market at $257.14 PSF.
So if the building Your Landlord wants to sell is 10,000 SF, here's a comparison of the difference:
$1,713,600.00 vs. $2,571,400.00
$857K More in a projected to-market sales price by using "perceived" current market rents, at your "perceived" expense.
How are you going to pay for that if you didn't even sign a lease yet?
The Buyer and the Buyer's Commercial Real Estate Investment or Leasing Broker will market the property you occupy as a Fair Market Rent of $1.50 PSF. The Buyer will then be expecting to start collecting $1.50 PSF ASAP.
Since you have leveraged value as a tenant...
....You should leverage that value.
4 Most Common Mistakes Tenants Make when Negotiating Their Lease:
1. Only Negotiating the Rent (often not very well)
2. Signing the Lease Without Changes (over 90% of the time!)
3. Underestimating Your Value (you are the landlord's money)
4. Letting the Landlord Know Their Building is the Only One that Works (the gotta-have-it syndrome)
Other Common Mistakes Cost $$$ and Pain
No Limit on Personal Guaranty
Many times it is possible for the Personal Guaranty to expire a certain amount of months or years after your lease commencement, well before the lease expires, or provide a specific dollar amount of guaranty. You can also use an "Evergreen Guaranty" which provides that the Tenant will personally guaranty a set number of months or years, commencing upon default by Tenant, but not equal to the total term and value of the lease.
These two strategies limit your liability in different ways, and can be used separately, or together.
Waiting Too Long to Start the Process
Market research, facility inspections, and analysis can take weeks. However, even after a location has been targeted, negotiations with the Landlord and legal preparation of the documents can take several more weeks, or even months.
After the Lease is executed (assuming the space is not going to be taken as-is) architectural plans need to be completed (1 -2 months), building permits need to be obtained (1 - 2 months, depending on local government policies and requirements) and then the actual build-out can get started (1 - 2 months, average). That's an additional 3 to 6 months.
If existing facilities cannot be found which are acceptable, then a Build-to-Suit needs to be performed, which can easily take 9 to 18 months +.
Six to twelve months minimum is a good time frame to use when looking for space to lease (18 months preferred).
Beginning a Space Search without Knowing Current and Long-Term Needs
Current needs include evaluating geographic location, square footage requirements, type of floor plan, communications needs, parking needs, access and security needs, and how your space will affect your business' cash-flow. For example, the single act of changing your business' location could significantly change your revenue.
Long term planning includes obtaining facilities and lease terms which allow you to expand, downsize, or relocate as circumstances dictate the company grows or shifts products and services.
Start the market research and facility search after meeting with leasing experts.
Hiring the Wrong Broker, or Not Using a Broker
Unless someone in the company is already an expert in commercial real estate, most business owners cannot (and should not) take the time to learn the intricacies of lease negotiations.
A good Broker counterbalances the Landlord's team of professionals, and is an important source of market knowledge and negotiation expertise. The wrong broker will provide incomplete information, and have difficulties managing everyone's alternative agendas.
Since commissions are paid by the Landlord on virtually all transactions whether or not the Tenant is represented, smart Tenants retain an experienced professional to represent their interests.
Lease Commencement Date and Certificate of Occupancy Date Aren't the Same
Unexpected delays in planning, permitting and construction can eat into a Tenant's build-out period and cause unexpected budget problems, like having your lease payments start before you can get into the space to start making money.
Tenants should have a clause in the lease which provides an extension of the commencement date if delays are encountered which are beyond the control of the Tenant.
Condition of Space
Tenants who take a property "as-is" put themselves at great risk. Even when the space looks fine and has been previously occupied, building codes may have changed or the unit's infrastructure may be broken or inadequate. It is best to have the Landlord guaranty the space is up to current building, fire, safety, zoning and ADA codes. It is also good to have the Landlord guaranty the condition of the electrical, plumbing, heating and air-conditioning systems for the first 60 to 90 days, or the entire term of the lease.
Videotape and photograph the space, and make a legal record of the condition prior to occupation.
Using the Landlord's Representatives
Tenants should use architects, general contractors and legal counsel under their control to create and review the various space plans, specifications, costs and documents. Very seldom does it make sense to use the Landlord's choices of service providers, unless you are in direct relationship with the service provider.
Lack of Understanding the True Cost of Space
Inexperienced Tenants are unable to perform a true comparison when determining different Landlord finish levels vs. Tenant Improvement (TI) contributions and lease incentives. In addition, lease types range from full service, to gross, to net. This confuses things leading to uninformed decisions.
Paying too Much Rent
Companies which do not obtain accurate, current market research may pay too high a rental rate. This is especially true with lease renewals.
In other cases we have seen, simply not asking for less rent than the offering rent costs tenants tens of thousands of dollars.
Not Enough Incentives to Lease
Get as much discounted rent or Landlord contributions to their build-out costs. Tenants often don't know what or how to ask for incentives.
No Outside Economic Incentives
When a company relocates it may be possible to obtain substantial economic incentives from local government. These incentives include tax rebates, relocation assistance, payroll subsidies during employee training, infrastructure improvements and others.
Many times the statutory incentives can be negotiated up substantially, and an inexperienced company may leave millions of dollars on the table.
Leverage Your Tax Revenue
More Common Leasing Mistakes:
Tenant Performs the Tenant Improvements
It may be better to have the Landlord perform actual build-out work, so that unexpected problems or delays will be the Landlord's cost and responsibility.
Limit on Future Flexibility
Will a neighboring Tenant vacate (or move -in) which impacts the business? What if your industry all of the sudden shifts downward because of rising costs? How fast will the company grow? Will it be necessary to downsize? How likely is a new partner or merger? Tenant's need as much flexibility as possible. Tenants should work with experienced professionals to insert language into the lease which will allow a cancellation or modification of the lease under certain circumstances. Following are four examples:
Expansion Right obligates the Landlord to provide Tenant with more space should it become necessary.
Extension Right, similar to an option, allows the Tenant to remain in the premises (right of first refusal).
Sublet Right gives a Tenant flexibility to sublease the space and avoid economic pressure.
Cancellation Right ("kick-out" clause) allows the tenant to break the lease under certain conditions such as when a tenant needs to expand and the Landlord cannot provide them additional space; percentage of tenant abandonment gives you the right to vacate your lease without recourse from the landlord.
Limit on Future Flexibility
Will the company want to carry a new product line or install a new technology? Tenants should be cautious with their "Use Clause" since these clauses can be very specific as to what goods and services the Tenant will provide, and may prevent a Tenant from offering a lucrative product or service in the future which has not yet been invented, or is currently being scrutinized.
Choosing the Wrong Location
Tenants who do not know the local market may locate into a declining area, making it impossible to hire and retain the highest quality employees.
Choosing the Wrong Location for Money Can Cost Money
Example 1: Retail tenant chooses a location in an unanchored property to obtain lower rental rates. Traffic and subsequent sales volume losses are substantially greater than rent savings?
Example 2: Office tenant (professional), trying to save a nickel (no kidding) per square foot, chooses a location on the wrong side of the river, next to the railroad tracks, close to an abortion clinic and adjacent to a mental health facility. In the other building that was a nickel psf more the adjacent tenants included those types that could have provided him with referrals? All this tenant could see was the nickel.
Yesterday's Technology
The office building is not set up with the newest in telecommunications and data cabling. Valuable prospecting and marketing time is lost, because management is too busy dealing with technical issues.
Taking Too Much Space
Tenant leases larger offices to please employees and customers. A better plan is efficient space; pay your employees more; offer your clients incentives?
Space Measured Incorrectly
Tenant did not verify the Landlord's dimensions and figures and paid rent on "make-believe" space, or paid rent on common area space, or paid rent on space where there are actually walls...etc.
Pay a Security Deposit That's Not Necessary
Landlord asks for Security Deposit as standard procedure, but does not require one depending upon Tenant creditworthiness and/or build-out requirements. A Tenant may also be able to get their security deposit returned after not being in default of the lease for "x" months or years. In other words, "Everything can be negotiable." Are you starting to understand why getting an early start on your real estate requirements is worth loads of money?
Narrow Search
Tenant limits its geographic area of interest, and does not complete adequate market education resulting in lost opportunities.
High Hold-Over Penalties
Standard hold-over penalties in first draft lease agreements are typically far higher than necessary. Landlords often use them to motivate tenants to exercise options. There are win/win compromises that can be negotiated.
Failing to Review the Lease
Tenants miss notification dates, resulting in automatic renewals, penalties, loss of use of space, and much more.
Our promise is we can help you negotiate a better lease than you have in the past. We might even be able to help you renegotiate your current lease, and come out ahead.
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