- Posted by Chris Carmen
- On September 20, 2014
Whether it is the start of an office lease or a lease renewal, the lease negotiation process is a critical time for determining a successful outcome of the tenant’s lease utilization. The negotiation process offers the opportunity to discuss, negotiate, and agree upon wants and needs with the landlord, in order for the tenant to walk away with the best business and economic terms possible. Unfortunately, tenants are unaware of their ability to leverage time and flexibility during the process, often leaving them with the short end of the stick.
1. Failure to Plan Ahead
It never ceases to amaze me how business owners and managers always seem to wait until the last minute to handle an upcoming lease expiration, a lease expansion, or even a total office relocation. Office leasing is one of those tasks where leverage in the negotiation process is everything. If the tenant believes it can negotiate the best possible economic and business terms with an existing landlord or prospective new landlord without creating a competitive environment, it’s simply naïve. Further, not allowing for enough time to negotiate a lease or lease renewal will place all of the negotiating leverage in the landlord’s lap. Rushing into a lease negotiation puts a tenant in a disadvantaged position instantly. Because of the need to move into the building as quickly as possible, the tenant has to put aside any negotiation tools it could have used if it had more time.
As a rule, when sitting on the tenant side of the lease negotiation table, it is ALWAYS to your advantage to have time on your side. When relocating an office, or when simply utilizing the threat of relocating an office, having too little time to adequately negotiate from a position of strength will put the tenant in the proverbial ‘corner’. Assuming it will take a minimum of six months to relocate, having any less time while threatening your existing landlord with the possibility of vacating is simply a threat you landlord knows isn’t real. Needless to say, it’s unlikely the landlord will concede much in the negotiation and may, in fact, be in a position to negotiate a relatively one-sided deal. By beginning negotiations early, you have the flexibility and time to go through a steady negotiation process, not settling until the best possible terms are agreed upon.
2. Lack of Knowledge
When it comes to commercial real estate leases, there are two types of knowledge: industry knowledge and market knowledge. Industry knowledge is simply ‘how things work’: length of leases; structure of the lease, such as industrial gross, full-service, Triple Net… add-on factors; operating expenses; tenant improvements, and; a myriad of other terms that come together to form the lease terms a business will be obligated during the length of the contract period.
Market knowledge, however, is the information common to a specific geographic market. For example, rental rates are quoted on a monthly basis in the West Coast, whereas, rental rates are quoted on an annual basis in most other areas around the U.S. and Free Rent may be used as an inducement for a tenant to commit to a building in some markets, but may not be present in others because office occupancy rates are high enough that landlords don’t have to offer any inducements for businesses to sign leases. As with any business, understanding the market is imperative to successfully negotiate the best lease terms.
3. Allowing the Office Lease to Control the Business
This is particularly true with early-stage or start-up businesses that often have a relatively short planning horizon. Imagine a business that can’t predict where they’ll be in 12 months, signing a five-year lease. What if the business needs more space in the second year, or less space, or needs to relocate to more appropriate geographic location, or….. In the above scenario, the business would be stuck for 3-4 years in space that no longer works for them. But they signed a longer lease than what was ideal because the landlord said they needed to. Well, they don’t ‘need’ to do anything. Instead of signing a five-year lease that far exceeds their business planning horizon, they should find a building that would allow a shorter lease that is more in line with their planning horizon. This same scenario can apply to many aspects of the lease.
The important constant: don’t let terms the landlord demands, define your business, but rather, the needs of your business should always define the office space and office lease terms. You’re about to commit your business to a lease for some time out in the future, so make it what you want! Leverage your position as the customer.
4. Entering into a Lease Without Complete Understanding of the Terms
Often, because of a lack of commercial real estate or market knowledge, tenants enter into lease agreements without a complete understanding of the meaning of each term and maybe more importantly, the implications of each term. I’ve lost count of how many times I’ve worked with businesses that have learned the hard way that they didn’t really understand the terms they agreed to when they signed their current lease. If you don’t know what a lease term means, you MUST ask for a thorough explanation. This may slow down the lease negotiation process a bit, but it can save you a lot of headaches and money later.
5. Didn’t Use a Tenant Representative
A common theme through the first four points is a lack of knowledge and expertise. That’s why over 90% of the commercial leases completed in the U.S. are done utilizing the services of commercial real estate brokers, serving both the landlord and tenant sides of the transactions. Businesses want the industry and particularly the market knowledge when negotiating for lease space. Further, astute business owners and managers distinguish between traditional commercial real estate brokers that work on both sides of the transaction, representing landlords and tenants and brokers that exclusively represent tenants, known as Tenant Representatives, or Tenant Reps. They do so to make certain the broker they engage to represent them will do so without conflict of interest, which occurs when the broker or broker’s firm is also representing landlords. In fact, many businesses will only utilize the services of Tenant Representatives when leasing space and an increasing number of businesses have a policy to only use Tenant Representatives when searching for and negotiating leases.
When you are negotiating a lease, a tenant rep is the equivalent of your best friend. With their extensive knowledge of the current market terms and conditions, they bring the experience to leverage the best possible terms from a landlord. In addition to bringing a wealth of knowledge to the table, the tenant rep does so with one objective: to make certain its tenant client receives the absolute best lease terms that fit their business and to do so at the lowest possible cost. The bottom line is if you’re going to negotiate for office space that will have a significant impact on your business’ bottom line, why wouldn’t you do so with an expert on your side of the table.