Friday, February 6, 2015

My Commercial Real Estate Lease is Expiring...Now What?

You knew, when you signed your commercial real estate lease some months or years ago, that this day was just didn't expect three to five years to pass so quickly! So now, as you approach your lease expiration, what should you consider?

This post is designed to provide counsel to you as you navigate your way through the maze of commercial real estate alternatives.

Before venturing into the marketplace, you should consider a couple of questions. Level with the way in which you answer these questions will dictate how you approach your lease expiration.

Is your goal to stay in your existing location and renew your lease? Would you prefer to move your operation to another location? As each direction is post worthy, today, I will discuss renewing your lease in your existing location.

If your goal is to stay: I would offer these suggestions to you if you want to renew your existing lease.

Engage some great expertise. This expertise can come in the form of a commercial real estate broker or an attorney. Each profession has its benefits. A CRE broker will not charge you for the effort as he seeks his compensation from the owner of the building once the renewal is completed whereas an attorney will bill you hourly. An attorney can advise you on lease language nuances but will not typically be well versed in market conditions. In my experience, both an attorney and commercial real estate broker are needed. The one thing that I would advise against is going the renewal route unrepresented. I have rarely seen this benefit the occupant.

Know where you stand. You may have renewal rights in your lease...options to renew, rights of first refusal, expansion rights, etc. Your advisor can walk you through your renewal options. One word of caution, here. If you negotiated your lease with a commercial real estate broker, your landlord may be obligated to pay that broker a fee if you renew. You are not obligated to work through the previous broker but it may behoove you to work with her if your relationship is in tact...after all, his fee and responsibility to you is precedent.

Contact your landlord. I suggest a call followed by a memorializing email. The essence that you want to share is that you are interested in renewing, you are considering your alternatives and you have engaged xyz to represent you. Your owner is now on notice that you are taking the renewal process very seriously and will respect the fact that your are approaching the important decision this way.

Grasp an understanding of the market. Now, your representative should educate you on current market conditions for a space such as rates, free rent concessions in the market, number of availabilities, recent comparable leases, etc. Get in the car and go tour some of the avails. You will be very happy that you invested the time.

Submit a proposal to your landlord. Based upon all that you have learned in the market, have your representative draft a renewal proposal for your owner.

Negotiate the best deal possible. Your owner is avoiding downtime, tenant improvements, and is generally paying a smaller brokerage renewal fee for renewing your lease. You are saving the moving costs, the disruption to your business, employees, and customers. Factor both positions into your negotiations.

Execute the agreement. Now its all done except the documents. Generally a lease renewal is accomplished with a one page lease amendment...unless the ownership of the building has changed since your last renewal or your lease origination.

If your goal is to move: OK, you will have to wait until next week. I promise you it will be worth it!

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