Friday, May 20, 2016

With an EXPIRING Lease, you'll make ONE of TWO Decisions



Image Attribution: www.culhanemeadows.com
Today, I want to discuss your commercial real estate lease agreement - you know, that twelve page document you gave a cursory review before you signed your John Hancock - the legal sized occupant of your bottom desk drawer - that tome you swore you would review at the beginning of the year and didn't - and here we are.

The goal today is to make sure the decisions are yours to make and not foisted upon you by the owner of your building.

When your lease expires you will make one of two decisions - you will stay or you will move. Let's do a deeper dive into both decisions, shall we?

You have decided to stay. Do you have the right to stay? In other words, does your lease contain an option to renew? If you don't have an option, have you spoken with the owner of your building to see if another lease is in his plans? Let's presume your lease has an option to renew. Most options contain time frames which are sacrosanct. You have a specific period of time in which to exercise the option - your desire to stay put. If you miss the exercise window, you may not be bounced, however, those carefully negotiated option terms may no longer be in force. With no option to extend, you should determine well in advance of your lease expiration your desire to renew. Engage your owner early - 12-18 months before your lease expiration and craft a renewal agreement. In the event, your owner has another idea - he's decided to sell your building and not renew your lease - you have adequate time to look for a new home for your business.

A move is in your future. The business has eclipsed all growth projections and the only way to continue the upward sales trend is to relocate to a larger building. Should you look for something to buy or should you consider a lease on a larger building? Two pieces of advice, here. Allow plenty of time to look at buildings, arrange financing (if you are buying), and lose a couple of negotiations. And, engage great help to shepherd you through the maize of commercial real estate availabilities. Unlike residential availabilities, commercial availabilities are not widely viewable on line. Sure you can scour LoopNet, however, LoopNet is designed to give you just enough information to prompt a call to the owner's broker. You really can't rely on the available data contained and the information is not readily searchable - especially if your operation requires a special feature such as an abundance of office space.

Is there a third decision? Absolutely! You can opt to do nothing, allow your lease to expire, and continue on a month-to-month basis while you plot your future. The problem with this strategy? Generally, commercial leases contain nasty little creatures called "holdover" provisions. Your owner has the right to increase your rent by as much as 200% if you occupy the building past the expiration. Some owners are adamant about imposing these holdovers - so beware! Without a lease in place, your owner can sell the building to an occupant who will soon be sitting in your office while you are loading the moving van - it happens! If you find yourself in a quandary, I would suggest renewing your lease for a short term - one year - until you get the space requirements figured out. If your owner will do this, you will save a innumerable amount of money and avoid a forced move.