Friday, August 29, 2014

I signed a #CRE lease, BUT I want out...now what?

Image attribution: www.swapalease.com
Your company was just purchased and the operation will be rolled into another location...check!

Or, you've out stripped the capacity of your location but you have time remaining on an existing lease...check!

Or, you have decided to shutter the operation, and outsource the manufacturing to China...but your lease expires a year from now...check!

Or, you decide to take advantage of  historically low interest rates and buy a commercial real estate location...but there is that landlord who wants to receive her rent for the next two years...check!

ALL of these scenarios and more can cause the need for a lease termination. But, just how do you accomplish this? This post is designed to give you some helpful suggestions to extract yourself from a lease obligation.

But first, the obligatories...I provide Location Advice to owners and occupants of industrial buildings in Southern California...AKA, I sell and lease commercial real estate for a living and have since 1984. I have encountered many occupants with the issues above over the past four decades. I believe this qualifies me a some sort of a guru...right?

OK, let's go to work and find a solution for that un-needed lease term!

Ask yourself these questions:

How much time remains on your lease? If the term remaining on your lease is less than two years, be prepared for your owner to use your remaining term as a "free" marketing time. The owner has the luxury of rent payments while searching for a replacement tenant or buyer.

What type of entity owns your location? A private individual may be a bit more flexible than an institutional owner such as a pension fund advisor or a REIT.

Where is your rental rate in relation to the current market? If your rate is above market, plan on subsidizing payments on the remaining term...if a replacement tenant can be found. If your rate is below market, your remaining term could provide a good alternative for a fast growing company concerned about a long term lease.

How does your lease treat assignment or subleasing? Most commercial leases allow for subleasing or assignment. Rarely is there a removal of your obligation, however. This means that if you sublease or assign the remaining term, you may still be liable for the payment of rent if the sub tenant defaults.

If your are moving to a bigger location, what is the rent amount monthly? If you are doubling or tripling in size, one month of rent in the old location could be a fraction of the monthly rent in the new location. IE: Old location rent is $5000 per month. New location rent is $15,000 per month. There are nine months of term remaining in the old location or $45,000. If you negotiate three months of rent abatement in the new location, you avoid a double payment.

How long would your building take to lease? Any competent commercial real estate broker can answer this for you. The answer to this question will have bearing upon a lease buyout.

Can some portion of the operation stay in the location through the term? I just sold a building to a company with 15 months remaining on a lease term. Rather than try to sublease the space or negotiate a buyout, my client elected to open another related operation in the space.

Are any of your neighbors crowded and in need of space? A fast growing neighbor can consume your space with a moment's notice...AND thank you!

Once these answers are clearly understood, you have some options:

Negotiate a buyout: I generally will suggest that an occupant call his owner and discuss the reason that the space is no longer needed. I suggest that the occupant ask the owner if she would consider a buyout of the remaining term and if so, for how much? Depending upon an up trending or down trending market, the owner response will vary. Assuming 12 to 18 months of term remain, an owner will generally compute the marketing time to find a new tenant, lease concessions (free rent and improvements), brokerage fees, and the variance of the current rental rate to market. All of these factors form the basis of a buyout offer. You can read this post on a recent buyout negotiation we successfully conducted.

Sublease or assign the space: If more than two years remain on your lease, unless you are dramatically below market, most owners will not consider a buyout of the remaining obligation. You then must find a replacement tenant to live out the remainder of your lease term. You can either do this yourself, hire someone like me, or ask the owner to do it.

Cease payment: I have NEVER recommended this but it is an alternative.

Live out the term: In the example above, my client loved the old location so he created a business operation to house the space and live out the remaining term.