When should you focus on your next lease?
|
With your current office lease expiring three, four or five years from now, there’s always something that’s a higher priority than new leasing negotiations, right? Yet it is precisely when lease expiration seems so far away that shrewd tenants score their biggest leasing coups – deals which will yield competitive advantages, typically for a decade or more. Starting early sometimes results in a lower rent, but that isn’t the point. What early starters angle for are important breaks on costly non-rent lease terms. For example, above-standard building services, meaningful operating expense controls, stronger sublease rights, more flexibility in alterations and improvements, reduced individual liability for partners and limited liability corporate tenants. Many chief executives miss these advantages because they start the lease negotiation process late, and they focus on one or two lease terms denominated in dollars, especially rent and workletter allowance. They talk about rent and workletter allowance as if these terms describe the total cost of a lease. Thinking they’ve done their job, they delegate to others the task of working out "the details." But landlords and real estate lawyers who work mainly for landlords are masters of "the details." They work with "the details" everyday. The effect of a reassuring letter of intent can be utterly reversed by "the details." It is in "the details" that seemingly good deals are commonly lost for tenants. By failing to make lease negotiations a high priority until expiration is only a couple years away, such chief executives let a valuable advantage slip through their fingers. They lose time needed to focus on "the details." Time lost can never be recovered. As you know, deals which seem worth pursuing often dead-end. Landlords don’t tell you at the outset how far they’re willing to go on various points. Only when negotiations are fairly far along are you likely to understand what’s really most important to a landlord and accordingly what trade-offs are available. You need time. When time is short, it becomes a gun at your head. You’ll have a tough time quickly finding space that meets your company’s requirements for space, location, electrical capacity, security, transportation, etc. You will have to conclude a deal fast, and landlords you talk with will know it. You will be under intense pressure to make concessions and accept bad terms – if you have time to recognize they are bad terms – because failure to conclude a deal and move out of your current building on time could mean substantial penalties, perhaps costly litigation, lost business. Starting early gives you tremendous bargaining leverage. If you start the process, say, five years before your lease expires, you can thoroughly shop the market, analyze competing alternatives and pursue a complicated negotiation. Unexpected snags won’t put you in a bind. In the event a negotiation fails to yield what you need, you can walk away and start over elsewhere. You have time to walk away from two, three, even four negotiations if necessary. Time is on your side. Recommended battle plan for a lease covering more than 30,000 square feet: Three to four years from lease expiration. Address questions which will reveal your likely office space needs. For example, do you need more electrical capacity? Are your hours of operation consistent with standard HVAC hours? Do you have special telecommunications needs which require redundancy? Is security a special concern? During your next lease term, is your company likely to be growing smaller or larger? Is the way you use space likely to change? Determine how financial terms of your current lease compare with current market conditions. If your lease is below market, there might be an opportunity to monetize it. Above-market, you should consider renegotiating it or look for a buyout opportunity. Start to survey the market. This means assessing physical, management and financial aspects of buildings where you might locate. * Physical: Is the space adequate and efficient? Will building systems satisfy your needs? Should you need to grow or get rid of space, can this be accomodated in a cost-effective way?* Management: Is service delivered promptly? Is ownership responsive to tenant concerns? Are practices flexible? Do other tenants report satisfaction? * Financial: Are operating costs in line with other buildings of this type? Are extra services billed at competitive rates? Are tenants free to use vendors of their choosing or does the landlord compel use of related parties? Two to three years from lease expiration. Start the first lease negotiation. You have a reasonably god idea of what you need, and understand what is currently available in the marketplace. Initial lease negotiations are the way to test your options – how far can you go in reducing rents, getting extra services, reducing company/partner liability for lease costs, and so on. You’ll find that the non-negotiable "deal points" are different at each building. Revise your financial, physical and managerial analyses of each building to reflect the information that comes from your negotiations. If need be, adjust your financial targets and refine your space selection criteria to reflect market conditions. Six months to a year from lease expiration. Conclude final lease negotiation. There’s plenty to do once a lease has been signed. Depending on the size of your space and the build-out required, such as interior finishes, telecommunications equipment, security systems, and so on, building out your pace can take from about eight weeks (after working drawings are completed) to several months. See that tight cost controls are adhered to (these should have been negotiated as part of your lease). Fast-tracking construction, and other "hurry-up" techniques resorted to when tenants face imminent deadlines often result in both higher costs and compromised work. Of course, some companies will have a much harder time than others realistically assessing their office space needs. Best overall advice: the sooner you are able to start the process, the more valuable your lease is likely to be for your company. |
|
|