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Renewing Your Lease? Consider This First!

Renewing Your Lease

Need to Renew?

 

Renewing a lease can be a pretty overwhelming and complex situation for corporate tenants who are accustomed to simply doing their job and not worrying about real estate.  While that’s tough, it’s also a way to learn what the current market is doing and how the current position of your business can determine whether you can negotiate better lease terms moving forward.

When you truly understand your options during a lease renewal negotiation, you can be a force to be reckoned with.  A tenant representation broker will arm you with market knowledge that you may not otherwise be privy to, help you to negotiate a lower rate, acquire additional amenities, and secure  the best deal possible for your business.

Read on to find out more way you can ensure a good deal for your business as well as how you can protect your future commercial real estate ventures.

 

Negotiate Early…It Only Makes Sense

 

When considering a commercial real estate lease renewal, it is always best to be proactive. Evaluate your situation, determine what is and is not working for your business, and communicate with your landlord 9-12 months before your lease agreement expires. Your landlord will consider these points while reviewing your renewal and will be well aware that time is on your side – time for you to look for a new space if your concerns are not fairly considered.

In the event that you don’t have time, I’ve got you covered.  What I just described is the best-case scenario, however, I have closed Class A office space deals within the span of a business week so I know it can be done.  If you have a tenant representation broker who is “Johhny on the spot” and is as “quick as lightning”, then you’ve got a great teammate fighting for you.  That kind of broker will alert the landlord upfront that “time is of the essence” and the deal needs to close fast.  If the landlord is on board, you’ve got a great situation in front of you and even greater representation behind you.

 

What’s Going On With Your Current Space?

 

Before making any sudden decisions, take the time to analyze how your business is performing in its current commercial space. This is an opportunity to determine if the space is still suitable for your company and its future growth. Items to consider are location, amenities for employees, office configurations, and tech-enabled infrastructure. These can all serve as discussion points in the negotiation of your renewal. There is a possibility that your current landlord may incur these costs if it means keeping your company as a tenant.  When you determine these factors, you can really increase your market knowledge which will facilitate an opportunity for you to have more leverage in negotiation.

 

Understand the Market Conditions

 

The commercial real estate market is dynamic, resulting in continuous changes year after year. It is important to be up-to-date on the current state of the market when looking to sign a new commercial lease or renew your current lease. Look at the market around you; are the rents similar to what you are currently paying for space? Are there other properties that offer additional benefits? Having this knowledge gives you the ability to be well informed while negotiating your current lease. If there is the potential to have some of these added benefits, lease renewal is the time to present them to your landlord.

Once you are more knowledgeable about the current market conditions, ask your tenant representative to negotiate an option or two for you.  The market changes every year so it would best serve you to lock in a good rate for as long as you can.  If it costs too many dollars for the same thing you had last year, it doesn’t make sense.  Don’t you agree?

 

Research Alternative Options

 

Even if you are comfortable in your current commercial space, it is always beneficial to educate yourself on other buildings and owners in the market. You may determine an opportunity that is a better fit for your company. Availabilities, rental rates, and amenities have probably changed since you were last in the market, so it is worth the time to look at your options. During your research, you will become more knowledgeable about the commercial real estate market. Whether you stay in your current space or sign another commercial lease, this information can benefit your negotiation process.

 

Work with a Commercial Real Estate Broker to Negotiate

 

Do not underestimate the importance of using a broker to help you negotiate your commercial real estate lease renewals. In addition to sharing their market expertise, tenant representation brokers are always aware of the current market conditions, opportunities, owners, and other brokers. They provide you with leverage to get the incentives that you and your business deserve and have a genuine interest in seeing you win.  Tenant reps know how important the right office space is for your business. An experienced broker can add value to your commercial lease renewal process, negotiate any required terms, and answer any lease related questions.

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Is A Personal Guarantee for Me?

Is A Personal Guarantee for Me

When entering into a commercial lease, the Landlord often requires a personal guarantee

from the business owner, even if they have formed a corporation or LLC, and may refuse to rent the space without one.  This means that the guarantors will make the lease and other payments if the business fails. Landlords often ask for a personal guarantee from start-ups and other small businesses.  Read very carefully the language about personal guarantees and how long they last and what happens if the business fails and can’t fulfill the remaining payments on the lease.

You may wonder why a landlord wants a personal guarantee.  When landlords have to pay for a large amount of tenant improvements (i.e. constructing the space to your specifications), personal guarantees are usually required.  If you are a small business with plans to grow or are unsure of the future, limit your personal exposure.  Designing the perfect office space shouldn’t be your highest priority.  Find practical space with a reputable landlord.

Statistics show that only 50% of all new small business start-ups will be operating in 5 years. 

If your landlord requires a personal guarantee, negotiate to limit the term of the guarantee or best yet, find a landlord who doesn’t require one, or find a really good broker who can present you to the landlord in a way that makes them feel as if you would be an amazing new, money-making asset to their center.

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Should I Get My Lease Reviewed?

Should I Get My Lease Reviewed?

Regardless of your industry, one of the first and most important agreements you’ll likely sign is a commercial or industrial lease agreement for your business. A lease agreement is also sometimes called a rental agreement. A clear and well-defined lease agreement helps both tenants and landlords understand their obligations and protect their interests.

When leasing a space, it is important to do your due diligence up front. Getting out of a bad lease can expose your business to substantial legal cost and liability. If you find a space at a location and price that works for your business, you should hire an experienced real estate lawyer to ensure that the terms of the lease agreement work for you and fit your plans.

Common Commercial Lease Terms

Term of the Lease – The term describes the length of the lease and its start and end dates. Subject to certain conditions and exceptions, your business is responsible for rent for the length of the term.  It is an agreement between a landlord and a business outlining terms and conditions of property rental. A commercial lease is specific to renters using the property for business or other commercial purposes versus residential use

Rent – The amount you must pay for the space is usually one of the major concerns any business owner has when entering into a lease agreement. Be careful not to get caught off guard by additional fees in your lease agreement, such as utilities, insurance, and taxes. These extra fees will increase your monthly payment, and therefore, you should calculate them into your rental estimate before signing a lease agreement.

Build-out – The process of finishing this raw space is known as the “build-out.” There can be extensive negotiations between the building owner (landlord) and the tenant over what improvements will be made, who will pay for these improvements, who will be in charge of getting the work done, and what will the tenant be permitted (or required) to remove at the end of the lease. Your business may need to renovate the space to suit your needs prior to moving in. Whether this involves extensive construction or slight modifications, your lease agreement should account for these build-outs…including who pays for them and who will own them when the lease expires.

Maintenance – This term identifies whether a landlord or a tenant is responsible for maintenance and repairs. This can vary from lease to lease and can encompass everything from providing for janitorial and handyman services to who pays for compliance with various laws and business codes.

Exclusivity Clause – An exclusivity clause limits your landlord’s ability to lease neighboring premises to your competitors. If you succeed in getting an exclusive clause, you’ll want to make sure that the landlord agrees to enforce it should another tenant breach its restrictive use clause (and thereby step on your exclusive). Your lease should spell out remedies for this type of situation—for example, the landlord might agree to give you reduced rent, an option to reduce the lease term, and no “cure” period (no time in which the neighbor gets to stop the offending activity without consequences). Most importantly, you’ll want an established amount of monetary damages that you don’t have to prove—the last thing you want is to go to court to prove how much business you lost because another tenant moved into your exclusive.

Sublease and Assignment – These provisions provide flexibility for your business to vacate its space without breaking your lease. Subleases and assignments allow a tenant to transfer the lease, or, in the case of a sublease, a part of the lease, to a third party tenant. Typically, a landlord will reserve the right to approve any potential sublease or assignment.

Liability & Indemnification – Indemnity is compensation for damages or loss. Indemnity in the legal sense may also refer to an exemption from liability for damages. The concept of indemnity is based on a contractual agreement made between two parties, in which one party agrees to pay for potential losses or damages caused by the other party. The allocation of risk is a crucial component in any lease agreement. These provisions outline each party’s liability, or responsibility to pay, for any damages, injuries, accidents, etc. that occur on the property. Typically, an indemnity clause in a lease allows the landlord to seek reimbursement, or indemnity, from the tenant for any money paid to a third party as a result of loss or injury on the property. As a tenant, you should be wary of indemnification that includes injury caused by the landlord’s own negligence.

Termination – Terminating a lease prior to its expiration without liability can be difficult. However, a lawyer can draft certain provisions—break, modification, breach, buyout and acceleration—into your lease agreement to account for an early exit.

Pricing – Depending on whether you need a lease drafted from scratch or simply reviewed, the cost of a commercial lease agreement can vary significantly. When you hire a real estate lawyer, you can expect to pay around $500 in the state of Georgia for a formal lease draft review.

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Your Lease Should Protect You

Your Lease Should Protect You

Although you do your best as a small business owner to forecast revenue and expenses, sometimes there are extenuating circumstances that affect your business’s success or failure. Since leasing office space spans such a long gap of time (relative to the small business cycle), is legally binding and commits capital over a period of time, it is inherently risky. Using a worst case scenario (terminating your lease early) and best case scenario (needing larger space), below are some helpful tips can that assist in the reduction of the overall risk associated with signing a commercial lease.

There are 3 ways you can protect yourself  

from a worst case scenario situation with your lease to include a Personal Guarantee, Assignment or Subletting, or Death and Disability clauses.  By signing a personal guarantee, you as an individual (typically the business owner) becomes personally liable for the lease payments. For example, in the case of bankruptcy, if you sign a 5 year lease on a property and your business only survives for 3 years into your lease, you will have to make the last two 2 years of payments from your personal accounts. When signing a lease make sure you understand what you what you are personally liable for.

Landlords typically ask for personal guarantees on space when they have to spend a lot of money into customizing the space to suit your business or if you, the business owner, are a start-up company.  Often times, a start-up company is viewed as a risk to the landlord so they may want to share the risk equally with the tenant. If this is the case, you can always negotiate.  Perhaps your broker can negotiate that you only personally guarantee the amount of improvements that are specific to your business or have the dollar amount decrease as you get closer to the lease expiration date.  If you happen to have a good broker, the landlord may agree to lift the personal guarantee if you show good payment history for a number of years (usually 2).

Having the right to assign the lease or sublet a portion or all of your office can alleviate many of the worst case scenarios that would result in your having to terminate your lease. If you are preparing to sell your business or feel that there is a chance you would need to relocate your office to another city or town, negotiating the right to assign the lease to another business willing to take it over or subletting some or all of the space can protect you in the future.

The death and disability clause is used in a lease to terminate the agreement should a specified individual (usually the business owner) pass away or become permanently disabled. For example, a law firm with only one lawyer and a receptionist might want to negotiate a death or disability clause into the lease so that if the lawyer passes away or cannot practice law due to an disability, the law firm (which now has no practicing attorneys) won’t  be liable for the remainder of the payments.

How to prepare yourself for a best case scenario

There are also ways you can protect yourself in a best case scenario situation with your lease where you need to acquire a bigger space to accommodate the needs growth of your business. You may want to include a Relocation/Expansion and Right of First Refusal clause to your lease agreement.  Negotiating a relocation clause in your lease typically gives you the right to move into any other office that the landlord has available for lease. Specifications vary so make sure you’re fully aware of the guidelines.

A right of first refusal in your lease means that you would like the landlord to ask you first if you would like to lease any adjacent spaces to your current office before they can lease it to another customer. “First rights” are beneficial because it could save you the cost of moving your entire office into a larger space. They are usually set up under a tight time frame, for example, you might only have 24 hours to tell your landlord if you’re going to take the space or not. Normally you will have to meet or beat the offer of the third party, so it might not be worthwhile to save the cost of the move if the terms and conditions of the deal don’t fit well into your business model.  Even with a tight time frame in place, be sure to think our your next move clearly and seek the advice of those you trust with your business dealings.

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Negotiation Mistakes You Should Avoid

Common Commercial Lease Negotiation Mistakes You Should Avoid

The main risks to consider when leasing a commercial office space is time, money, and risk

You must understand which location is going to yield you the best rate and terms. You also want to avoid choosing a bad location or making an erroneous operational decision.  Furthermore, you need to keep in mind what your options are in the event that your business needs to expand, contract, or relocate.  You must also consider how long it will take to find the right location for your business, the time needed to negotiate your terms, as well as how long it will take you to move in and become operational.

Your tenant rep broker can usually create a market survey for you outlining available properties within a week by motivated companies already familiar with the local market.  These are just a few of the preliminary tasks that are done but many other complications, often overlooked, need to be factored into the space acquisition timeline.

 

#1 Allow Enough Time

  • Negotiations can take weeks or even months
  • Once the lease has been fully executed, if the space needs a build-out, you can expect to wait another one or two months
  • Before renovations can begin, permits need to be obtained and can take one to two months
  • Before permits can be obtained, architectural plans must be completed and can take one to two months
  • If new construction is in the plans, that can easily take from 9 months to 1 year to complete

 

 

#2 Don’t Neglect Long-Term Responsibilities

Potential tenants who don’t think about the forecast of what their business requires can prove to be a detrimental problem.  Business owners who only think of solving their immediate needs can face expansion problems way sooner than they expected.  In addition to considering short-term needs such as square footage requirements, floor plan, communications needs, parking, and accessibility, make sure those considerations can expand to the overall vision of growth for your business. By negotiating lease terms which will allow the company to expand, downsize or relocate as circumstances dictate, business owners can avoid the unnecessary headaches, loss of business and costs associated with relocating. Examples of such important lease clauses include:

  • Expansion rights which obligates the landlord to provide the tenant with more space in the event of company growth
  • Cancellation rights which allows the tenant to break the lease under certain conditions such as when the tenant needs to expand and the landlord cannot provide the tenant additional space
  • Extension rights (which is similar to an option) which allows the tenant to remain in the premises
  • Sublet rights which gives the tenant flexibility in that, if they must relocate, they may sublease the space

 

#3 Inadequate Representation

Unless someone in the company is versed in commercial real estate, most businesses will need to find adequate representation through a tenant rep broker.  Lack of representation and industry knowledge combined with time pressures can cause unrepresented owners to make location decisions without being aware of all the choices available to them and make costly errors that cut into their profits.  An experienced and specialized tenant rep broker counterbalances the landlord’s leasing agent and insures that the tenant receives the best possible rates, terms, incentives, and lease clause protections.  What is amazing is that this services comes to the tenant at no cost to the tenant whatsoever.  Tenant rep brokers usually share the leasing fees paid by the landlord.

Using the wrong broker can lead to incomplete information or conflicting loyalties because of hidden agendas or landlord relationships.  You must keep this in mind when working with a large firm because, often times, they represent both the landlord and the tenant which can lead to obviously potential problems.  Business owners who don’t use a tenant rep broker will likely not be aware of all the possible location choices.  This is because experienced tenant rep brokers have developed an extensive network and can find locations that are not yet vacant or on the market.  Lastly, it is super, super, super important to keep your broker informed.  Your broker cannot properly assist you if you have not provided full-disclosure on your situation and your company.  Giving this information to your broker will help them to best negotiate for you and will prevent uninformed decisions from being made as well as lost opportunities.  If you are looking for good representation, click HERE.

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Creating Leverage in Lease Negotiations

Creating Leverage in Lease Negotiations

Are You Creating Leverage?

In order to get the best deal when looking for commercial space, be sure you are creating leverage in your lease negotiations.  Hiring a broker is the first step you can take toward creating leverage. For example, you can go to the grocery store to purchase milk and notice the price says $2.99.  You can’t take that jug of milk to the cashier and ask to pay $2.00 instead.  She is going to tell you what the price is and insist that you either pay full price or leave the milk. The cashier can be likened to the leasing agent (landlord’s broker).

You, the business owner, would be handled in the same manner if you approach a landlord unrepresented by your own broker. 

They will tell you how much the rent is, determine the condition the space will be delivered in, and  with no input from you.  You can either take it or leave it.  If you have a broker, the landlord understands negotiations will take place at some point and they will be willing participants.

Once you are solid on the location that you want to occupy, let your broker know which property you want.  Your broker will contact the landlord on your behalf and tell them, “Congratulations!  Your property has made my client’s short list.  Send me over your best terms.”  That short email will help you create even more leverage.  The landlord’s broker now understands that you have options in front of you.  They also understand they will to have to offer you a deal with favorably aggressive terms.  They are aware you are “shopping around” and the war begins to attain your business begins.

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What is Tenant Improvement (TI) Allowance?

What is Tenant Improvement (TI) Allowance

Almost every tenant of a commercial space will need to make some changes or improvements to the space to make the space work for them. Of course, the extent of needed improvements will vary depending on whether the space in question was previously occupied, how old the existing improvements are and whether the prior uses and if the new contemplated uses are the same. A new building that has not been previously occupied may have bare concrete floors, no drop ceilings and no distribution of mechanical, electrical or plumbing systems and may require extensive improvements. On the other hand, a space that had been occupied for a short period of time for a similar use contemplated by the new user may require few changes. In this case the tenant improvements may be limited to

new paint, carpet cleaning and minor touch-ups and repairs often called “broom-swept”, “vanilla box” or “white box” condition.

When addressing tenant improvements in a lease, there are two main questions that need to be addressed: “Who is doing what?” and “Who is paying for what?” We will start with “Who is doing what?”

A common phrase in real estate leasing is “turnkey build-out,” which is meant to imply there are usually major enhancements done to an area before a tenant moves-in. These allowances are paid by the landlord once both the landlord and tenant agree to certain changes. If the improvement cost is too high, the landlord may reject the proposal. If this occurs, a tenant can negotiate further, modify the plans, or offer to pay for part of the improvements, either up-front or through a higher rent. Realistically, it is rare that a space is ever truly “turnkey” as most leases allocate to the tenant the responsibility for some portion of the improvements, namely installation of furniture, phone and data cabling and communication and computer systems. Other phrases include variations of “a white box,” intended to describe a space that has finished floors, ceiling and walls, lighting and heat/air conditioning; and “a cold dark shell,” which is a demised space that has no heat, no light, and no finishes.

If the landlord is performing the tenant improvements, then those improvements need to be clearly specified in the lease. This benefits both the landlord and the tenant. The landlord needs to know what it is obligated to deliver under the lease. Likewise, the tenant needs to know that the landlord will deliver the space to it in the manner described so that the space will have the utility that the tenant expects. One of the easiest ways to clearly describe the tenant improvements is to attach to the lease detailed plans and specifications for the improvements. Many leases include a plan showing the layout of the proposed tenant improvements and provide that the landlord will perform those improvements using “Building Standard” materials and finishes.

Again, the parties should clearly describe the “Building Standard” materials and finishes.

The tenant also needs to know that the work being performed by the landlord will be done by the time the tenant needs the new space. Many landlord-friendly lease forms provide that the landlord will perform the tenant improvements but fail to specify a time period by which the improvements will be completed. In these cases the tenant may be obligated to commence payment of rent before the work is even completed. The tenant must demand that the tenant improvements be completed prior to the commencement of the lease term and its obligation to start paying rent. In addition, the tenant should demand that the landlord agree to an outside date for the completion of the tenant improvement and delivery of the completed space to the tenant.

This price is usually stated per square foot and can range in amount. These spaces normally already have interior walls, paint, electrical outlets, carpeting, and more. In a lease, TI allowances usually increase with the number of years and square footage stated. If you lease a 1,000 SF office for five years, your TI allowance will be lower than someone who is renting a 50,000 SF office for ten years. For example, if a tenant was renting a 10,000 SF office and the improvement allowance was $15 PSF, then the tenant already has $150,000 promised by the landlord to improve the space however they choose.

We advise you to hire an architect or a space planner to help you design the best office layout with your turnkey build-outs or tenant improvement allowances.  Depending on the contractor, sometimes he or she can create the plans for you instead.  The best office layouts increase productivity and good moods throughout the office. Excellent layouts can include open space to move around more easily, leaving room for future storage, and allocating the best areas for functional work space.

The process related to constructing tenant improvements is a complicated one and can have a material impact on the parties’ business operations. It is crucial that the parties clearly provide for each party’s rights and obligations under the lease with respect to the completion of the tenant improvements in order to ensure each party achieves its business objectives. These allowances are one of the most negotiated points in a lease. Your tenant broker will make sure you receive the best TI allowance or turnkey build-out possible.

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So…What is in My Commercial Lease Anyway?

So…What is in My Commercial Lease Anyway

Landlord and tenants sign lease agreements when renting property. What is included in this lease will vary. However, there are certain basics you should know about lease agreements in general. Leasing business space is a major obligation.  The successes or disappointments of your business may ride based upon specific terms of your rental agreement so it is important to gain a basic understand of commercial leases and what is usually included in one. Before you approach a landlord, you should to see how commercial leases contrast from residential leases.  Furthermore, before you sign anything, ensure you comprehend and concur with the fundamental terms of the rent (i.e the length of the lease term), the amount rent, and the floor plan and configuration of the physical space.

It’s crucial to understand from the get-go that, practically and legally speaking, commercial leases and residential leases are quite different.

Here are the main distinctions between them:
  1. Commercial leases are not subject to most consumer protection laws that govern residential leases — for example, there are no caps on security deposits or rules protecting a tenant’s privacy.
  2. Many commercial leases are not based on a standard form or agreement; each commercial lease is customized to the landlord’s needs. As a result, you need to carefully examine every commercial lease agreement offered to you.
  3. You cannot easily break or change a commercial lease. It is a legally binding contract, and a good deal of money is usually at stake.
  4. Commercial leases are generally subject to much more negotiation between the business owners and the landlord, since businesses often need special features in their spaces, and landlords are often eager for tenants and willing to extend special offers.

 

Before you consent to a lease agreement, you ought to deliberately explore its terms to ensure the lease addresses your business’ issues. To begin, ensure you can manage the cost of the lease and that the length of the lease makes good business sense. Additionally consider the physical space. In the event that your business requires alterations to the current space, determine whether you (or the landlord) will have the capacity to roll out the improvements.

Other, less conspicuous items spelled out in the lease may be just as crucial to your business’s success. For instance, if you expect your hair salon to depend largely on walk-in customers, be sure that your lease gives you the right to put up a sign that’s visible from the street. If you are counting on being the only sandwich shop inside a new commercial complex, make sure your lease includes a exclusivity clause that prevents the landlord from leasing space to a competitor.

Many more items are often addressed in commercial leases. 

It would be a good idea to familiarize yourself with the following clauses:

– the length of lease (also called the lease term), when it begins and whether there are renewal options

– rent, including allowable increases (also called escalations) and how they will be computed

– whether the rent you pay includes insurance, property taxes, and maintenance costs (called a gross lease); or whether you will be charged for these items separately (called a net lease)

– the security deposit and conditions for its return

– exactly what space you are renting (including common areas such as hallways, rest rooms, and elevators) and how the landlord measures the space (some measurement practices include the thickness of the walls)

– whether there will be improvements, modifications (called build outs when new space is being finished to your specifications), or fixtures added to the space; who will pay for them, and who will own them after the lease ends (generally, the landlord does)

– specifications for signs, including where you may put them

– who will maintain and repair the premises, including the heating and air conditioning systems

– whether the lease may be assigned or subleased to another tenant

– whether there’s an option to renew the lease or expand the space you are renting

– if and how the lease may be terminated, including notice requirements, and whether there are penalties for early termination, and

– whether disputes must be mediated or arbitrated as an alternative to court.