The planning process for a relocation of a business’ office or warehouse space, or negotiating a lease renewal, can take several months. Therefore, tenants should begin their preparations early. Time is always the friend of a tenant when planning an office relocation or lease renewal. A long lead time lends itself to a thoughtful and thorough negotiation process and prevents the tenant from being backed into a corner in the negotiation process, leaving the tenant with only one option: whatever the landlord wants. I can’t tell you how many times I’ve received a call from a business owner or manager having facility responsibilities that has realized at the 12th hour they’re about to pay a premium over market and enter into a lease or lease renewal that meets few if any of their business objectives. My experience over 30+ years is that a well thought out office relocation or lease renewal can save a business in excess of 20% on lease costs.
Even when a tenant is planning to renew its existing office lease, beginning the process of evaluating the market well in advance to make well informed decisions about the space and the rent a tenant will pay can be invaluable. The common wisdom is: “I’m happy with my space, so I’m just going to renew the lease”. However, business owners and managers should never forget the landlord’s objectives are completely inverse to the tenant’s. The landlord wants to spend as little money and get as high a rental rate on a lease with as little flexibility as possible. The tenant on the other hand often wants to spruce-up the space for the benefit of employees, have as low a rental rate, and as much flexibility in the lease as they possibly can get. Therefore, a tenant intending to renew a lease still needs to do a thorough analysis of the market as possible.
When a tenant is planning to make a wholesale move from a current location, business owners and managers cannot underestimate how long it takes to deploy a thoughtful evaluation process of the space, the market, negotiate the terms and lease agreement, and allow enough time to plan, buildout, and fixture the news space. It’s not uncommon for the entire process from start to move-in to take 6-months to a full year. By not allowing enough time, the tenant will attempt to do so at a frantic pace that will cost the business money in lost efficiency and focus on the core business, and potentially put the tenant in “Holdover” beyond the lease term in the existing space. If you read your lease, holdover penalty rates can cost a business as much as 200% of the rent the tenant is paying at the end of its lease term. The landlord objective of a holdover clause is to essentially put the tenant that is considering a relocation in the corner and force it to sign a one-way lease, in favor of the landlord.
In order to effectively execute a building relocation or negotiation for a lease renewal (that can be a time consuming process) will include many or all of the following steps:
Evaluate the business’ facility requirements going forward, as the business’ space usage and layout may have changed since the business last entered into a lease agreement.
This gives them the opportunity to compare offers from different landlords or locations and find the best fit for their needs. Additionally, it allows tenants to leverage competition between landlords, which is an important tool to maximize economic benefits on such a large transaction. Waiting too long may prevent tenants from getting the most out of their investment in a new space, as they might not have enough time to make an informed decision. Starting the preparation process in advance helps ensure that the tenant’s interests are taken into account when negotiating a lease renewal or relocation agreement.
Finally, I hope business owners and managers take note of the above information, because getting started on your lease process early will save you money and prevent landlords from dictating the terms by which your business is going to operate. Office space searches can be a time consuming and complicated process, which is why, whenever possible, tenants should engage a commercial real estate professional that knows the market and has experience negotiating on behalf of tenants. Beware of brokers that spend much of their time working with their best customers…..landlords and building owners. Their advice can’t help but to be skewed in favor of landlords, where they derive most of their income. To avoid this conflict of interest, in most 1st and 2nd tier markets, tenants can locate and engage an office broker that specializes in only representing tenants. These brokers are known as Tenant Representatives, or Tenant Reps. They’re worth their weight in gold and can have a big impact on the outcome for their tenant clients.