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In
a given year - a portion of a commercial agent’s income will be derived from
completing lease deals. These come in two flavors - new leases and renewals.
Yes! In many cases our clients engage us to assist with renewals. Today, I’ll
focus on some suggestions as you approach your decision to relocate or renew -
akin to “Love it or List it” on HGTV.
Understand your owner’s position. Is the rent
that you pay sufficient to cover the owners’s mortgage? Is the building owned
free and clear? Is this the only building owned? Can the owner afford a
vacancy? What is the nature of the ownership - sophisticated or mom and pop?
What are the owner’s plans for the building - hold or sell? All of these
variables will play into your ability to craft an acceptable lease renewal. As
an example - if your rent barely eclipses the owner’s costs - he may be
unwilling to negotiate. Conversely, a building owner with no debt can be more
flexible.
Understand your position. In many cases, you know the
building better than its owner. After all, your business has lived there for a
period of time and weathered roof leaks, air conditioner outages, a shortage of
parking, break-ins, and truck access. You reside despite the “warts”. However,
if you vacate and another occupant must be found - will the new tenant discount
for these deficiencies? What sort of renewal rights - if any - are contained in
your lease? Do you have an option to extend? How is the option rent calculated?
Finally, has your operation outstripped the capacity of the real estate or are
you swimming in excess space?
Know where you are relative to market. Lease rates
have increased exponentially over the past five years. If you crafted your
agreement prior to 2015 - chances are your rate is dramatically below current
levels. Plus, inventory percentages - number of available buildings on the
market - are at historic lows. Therefore, if you’re not prepared with this
knowledge - you’re in store for a shock!
Calculate your moving costs. Moving
companies will gladly visit your site and give you a complimentary estimate of
the cost to move your operation. However, don’t forget other relocation
variables such as electrical feeds, special permits, downtime, and key employee
drive-time. An owner will bank on the disruption and cost of moving your
operation in his negotiations - so know your stuff.
Do some math. On your side of the aisle - you
have relocation expenses, rent in the new facility, and the goodies that
accompany a new lease - free rent, fresh paint, new flooring. But, you’ll pay a
market rate for these amenities. On the owner’s ledger will be the expense to
replace you - building refurbishment, lost rent from the vacancy, free rent for
a new tenant, possibly some special stuff like a new office or two, and
transaction fees. Most of these allotments will be “lost forever” - IE: an
owner will never recoup them. Many times, the cost of replacing you can amount
to 15-25% of the lease consideration - the total amount of rent you’ll pay for
the term.
Start early. I cannot stress this enough! Your
negotiating strength depends upon it. 12-18 months in advance of your
expiration is advisable.
Allen
C. Buchanan, SIOR, is
a principal with Lee & Associates Commercial Real Estate Services in
Orange. He can be reached at abuchanan@lee-associates.com or 714.564.7104. His website is allencbuchanan.blogspot.com.