Part III – SimpLEASEity

Why a Tenant Rep?

A Tenant Rep is a highly trained specialist who safeguards lease exposure, manages expectations, analyses each property, and assures the negotiated lease terms are what market conditions dictate as fair.  The Tenant Rep keeps you informed of industry changes, trends and will assist with lease renewals.

Think about it, a business owner seldom searches for office space.  At most, a company moves two or three, maybe four times during its business life.  The average lease term is three to five years, sometimes ten. If the lease is written well from the get-go, the Tenant Rep will have negotiated a renewal option toprotect the leaseholder’s (Tenant) rights, securing a strong business location for years to come.  Yet not having a lease renewal can be troublesome at best.

Industry Lingo: Renewal option is a Tenant’s right given by the Landlord, for the Tenant to continue in the leased space at the expiration of the current lease, on specified terms and conditions. A renewal is a new lease agreement in the form of an amendment to the original contract.

A Classic Case

To further explicate the importance of hiring experienced professional Tenant Representation, below lays out the consequences of not having a written renewal option built into the lease for the Tenant.

For some professionals, such as a dentist or doctor, remaining in one location for the life of their business is crucial.  Imagine, within four years of your five-lease term, your business is flourishing beyond expectation. Clients know your location. There is great building signage and easy parking. Your patient base has expanded. Years of hard-earned success is finally at your doorstep.

Six months later, the Landlord calls.  She politely advises your lease expires in six months and to stay your new rental rate will increase $5.00 per square foot annually. For your small business occupying 2,400 square feet, this equates a rent escalation of $1,000.00 per month.  Ouch. I can’t tell you how often this happen.

‘Take it or leave it’ is the Landlord’s humble philosophy.  Suddenly you hear, “Check.” in this one-sided chess match. Being forced to pay 25 percent more for your budgeted rent, or having to relocate unexpectedly is never a good option.

Crisis mode is high alert. How will you retain 100 percent of your clients and continue your services throughout the relocation process? Other dentists are clamoring that rental rates in the city are escalating. One even shared they haven’t been able to find a new second location for expansion.

On top of it all, your Landlord knows the game. She is banking that you will suck it up, sign another lease term and pay the increase. She smiles all the way to the bank while you’re scrambling. Yes, you lose.

The Landlord knows she has market conditions on her side.  Office vacancies in the surrounding area are minimal and other Landlords have raised rents. If you don’t sign another lease, another business will. It might even be your colleague who hasn’t found a suitable second location.  And they will capitalize on your patients not being willing to relocate. Oh, did I mention, if you decide to stay, it is very doubtful the Landlord will offer you any tenant improvements like fresh paint or new flooring for that additional rent you are paying over the next five years?

In this scenario, you are livid and wonder how the Landlord could do this to your livelihood?

You ask your “friend”, the property manager, “How can the Landlord raise my rent so high? I can’t pay that and stay in business.”

The sympathetic property manager responds, “Sorry, Joe, the market has shifted, and the Landlord can command higher rents. It doesn’t pay to keep you at $3,500 per month when she can get $4,500 per month.” And because he’s your friend he adds, “I have a nice office building that is about $3,500 a month on the other side of town.”

“My clients need public transportation which is not on that side of town.” Joe’s face reddens, and he tugs at his collar. “I’ll talk to my lawyer and if I have to; I’ll sue.”

The property manager straightens and replies, “Joe, I don’t recommend you spend the money on an attorney. Your lease expires in six months and you have no rights to stay on at this location. Your lease doesn’t have a renewal option.”

The not-so-favorable terms are right there in black and white. Joe won’t be suing anyone and if he insists on going that route, the only winner will be the attorney he hired.

How could Joe have avoided this scenario? Joe could have engaged a qualified Tenant Rep who knows the ins and outs of their CRE market prior to selecting his office location.  A good CRE attorney, a prudent check and balance, upon reviewing the draft lease would have also asked Joe if he might stay at this location beyond the five-year lease term. The attorney would have noted there was no renewal option and suggested one during lease negotiations.

However, the reality is, often by the time an attorney reviews a lease draft, the main financial points of the lease have been negotiated.  The Landlord doesn’t have to renegotiate this late in the game especially when it’s not in her favor. Landlords know that once all parties have reached the draft lease phase of a transaction, that in the Tenant’s mind, the office suite is already their new home.  Furthermore, often it is too late to find and alternative location.

In the case of a renewal, when the market shifts in the favor of the Landlord and vacancies are low, there is very little negotiating a Tenant can do unless it was predetermined in the lease way back in the beginning.

Business Owner Tip:

The closer you are to signing a lease, the less negotiating power you have unless you are willing (and able) to walk away from the deal. This is because Landlords know the clock has almost run out on your current lease.

In my upcoming book, it is all you need to know about office leasing.  Included are insider secrets to proactively avoid problems and $$$ money saving tips.

The first portion discusses the attributes of a skilled Tenant Rep and how to qualify them.  The second portion outlines the 11-step lease process in detail as an example Tenant navigates their way through the intricate process. At the end of the guidebook, for easy reference, is a list of common industry acronyms, industry definitions, a streamlined checklist of the lease transactional process, and key lease points to negotiate on behalf of the Tenant. To be added to our Pre-sale list, email andrea@andreadaviscre.com.

To be continued…