Monday, November 9, 2009

Office and Facility Leasing

This article was written by Dennis Wright, SCORE Orange County Management Counselor

In an earlier article I said that renewing an existing facility lease should not be attempted without help from a qualified real estate professional - an experienced commercial real estate broker - and that statement generates questions like this one: “I leased this space on my own and I’m not planning to relocate, so why do I need help from a broker now?” The answer is without help from a broker you won’t know if you’re getting the best lease renewal terms possible / you won’t know if you’re actually leaving $$$ on the table when you renew your lease.

Consider this; when you leased your present facility you probably looked at numerous properties and then, based on what you had seen and learned, negotiated what you felt was fair and affordable rent for the space you wanted. You may have even gotten some landlord concessions, such as a tenant improvement allowance to facilitate your occupancy. Now here we are several years later, the market has changed dramatically, and you are focused more so than ever growing sales and reducing expenses.

So what do you do; do you negotiate for a 3% or 5% reduction in rent, or perhaps insist on a 10% or 15% reduction? If so on what basis? Without up-to-date market knowledge and information from “non-public” sources you are not properly prepared to take that next step. Simply put you don’t know what’s out there, what you ought to be asking for or how and when to go about asking for it. At this point I’m reminded of a few words of wisdom passed along to me some years ago: ”landlords value un-informed tenants”.

First of all a good broker is going to recommend that you begin the lease renewal process well enough in advance that relocating your business (even if you are not interested in doing so at this stage) prior to the end of your present lease term is possible. Doing so, combined with the fact that you have a broker representing you, sends a powerful message to your landlord. Secondly he will gather data on comparable properties, both available and recently leased, including renewals for comparison purposes. You will see how long those spaces have been or were on the market, and specifics on landlord concessions such as free rent, tenant improvement and refurbishment allowances. In addition an experienced broker will know how aggressive certain landlords are in terms of deal making and which landlords may be more motivated than others based on their present financial condition.

With this information you will be properly prepared to take the next step and have the broker begin negotiations in your behalf. Bear in mind though if your landlord comes to you, and he likely will, saying that he could have made a better deal without a broker being involved / without him having to pay a broker commission you have no way of validating that claim. Fact is, the threat of you relocating, be it real or perceived, and the information your broker accumulates to support your negotiations almost always produces the best lease renewal terms possible.