Eight Mistakes Companies Make When Negotiating Office Leases on Their Own
Only weighing short-term needs
Lease terms can be anywhere from one to 10 years or more. You will almost certainly get a better rate and more substantial concessions with a longer-term deal, but it takes a little foresight. How does your business look historically? What does this year look like? Do you have any specific contracts with hard renewal dates that need to be considered? How do you anticipate your head count and space needs to fluctuate over the course of the lease term? Bottom line: Companies often look clearly at today’s picture and plan poorly for the years ahead.
Neglecting attorney advisement.
It may seem easy to review a lease on your own and say ‘good enough.’ Sometimes it is, but sometimes major issues can arise that you were unprepared to address. You can head these issues off and potentially save your company exponentially down the road by spending a little money now on a knowledgeable attorney. An attorney with extensive real estate law experience can help you navigate issues such as how capital expenses are allocated, what is your exposure and how your assets are protected. Bottom line: Consulting a licensed attorney during lease negotiations can help you ask the important questions before the bad things happen.
Leaving concessions on the table.
Price is the focal point for most companies in a negotiation. However, there are many other pieces to consider. Free rent, growth options, termination options, project management and moving allowances are other factors that, when deployed in the right manner, are just as important to the company’s future as the price of rent. If done improperly, these improvements can drain a company’s time, energy, and money – all of which take away the focus of the business. Bottom line: Tenant improvements are often the biggest factors in a negotiation – they can make or break a deal.
Creating unnecessary exposure.
Landlords typically want some sort of security to ensure that the lessee has some skin in the game. They might ask for verification in the form of security deposits, lines of credit or personal guaranties. If a personal guarantee is required, is it for the entire lease obligation or does it ‘burn off’ throughout the lease term? Also, if your company has strong national credit, does that qualify you to provide a lot less? Another area of potential exposure is the responsibility for upkeep of the facility (HVAC, roof, etc.). Who pays for a new air conditioning unit if it goes out? Who pays for window glass if it gets broken? Bottom line: Security and guarantee requests are reasonable, but they are often negotiable.
Painting yourself into a corner.
Time is money. By far the No. 1 mistake made by companies is not allowing enough time for the real estate search and negotiation process. If you’re not starting the conversation six months ahead of your current lease expiration, you’ve already started painting yourself into a corner. Depending on the size of your company, 12 to 24 months is probably a reasonable time to start the process. Allowing for this time enables a quality negotiation and the positioning for alternate options. Bottom line: If you don’t have time, you don’t have leverage.
Realizing total occupancy costs.
Know the bottom line. In this part of the country, commercial real estate rates are quoted on a per-square-foot per year basis. Have you figured out the total dollar amount for the footprint you want to occupy? How does your rent schedule look throughout the course of your lease – escalations that can appear small when quoted per square foot can be quite substantial when figured out in actual terms. How are operating expenses passed through? Which ones are considered controllable expenses and is there a cap on those? When comparing options, don’t forget to factor in parking, as it can add as much as $8/SF onto your rental rate.
Tackling the real estate search and negotiation process takes time and market knowledge. Businesses that attempt to save money by doing it alone often do themselves a real, measurable disservice. How do you know that you are considering all the options in the marketplace? How do you know that the rate and terms you are negotiating are in line with the market? How much time is the process taking away from running your main business? Most importantly, the landlord will have a listing agent representing its interest; shouldn’t you have someone represent yours? Landlords expect to pay broker commissions – they have them built into lease rates. Make sure you have someone in your corner. Bottom line: A skilled professional real estate broker uses his or her market experience to negotiate a deal that far exceeds their fee, which is paid for by the landlord, not the tenant.
If you are open to looking at cities, states or jurisdictions outside of where you are located or familiar, there very well could be economic incentives from those areas. It doesn’t hurt to take a look. Bottom line: Sometimes the grass really is greener elsewhere. It can benefit you to expand your search to different areas.
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