admin / July 1, 2019
“Risk comes from not knowing what you’re doing.” – Warren Buffet
Leasing decisions not only can have a significant impact on operating budgets but can also have major strategic impact on a firm’s success. This is not a decision to make lightly, and I always recommend examining all options very carefully. The first question we should explore is, should you stay in your current location or relocate? Initially, relocating may seem like a huge endeavor, but the effort could be well worth the investment. In some cases, we find that staying in the current location is not the best option in the long run. I encourage business owners to seriously consider their strategic direction and goals, and then decide if their existing location supports where they are headed in three, five, even ten years. Working through the what-ifs with a trusted commercial real estate advisor can help you think through the possibilities.
If your existing facility satisfies your current and long-term business needs, but you are nearing the end of your lease term, you may consider renewing the lease. If so, it is important to bring a trusted commercial real estate broker and advisor to represent you in negotiating the lease renewal. This is an area where I see many business owners sacrifice opportunities to significantly improve their lease terms and rates because they are not aware of everything up for negotiation. Most business owners I know are really good at what they do. So good, in fact, that they believe they don’t need assistance with lease negotiations—they believe they can handle it themselves. What they don’t realize is how much a good commercial real estate advisor can improve the outcome.
Negotiating through a real estate broker keeps the tenant at arm’s length and provides greater leverage in negotiations. A good advisor’s market-specific intelligence will aid in negotiating the best terms and most concessions in the leasing deal. Business owners are usually great negotiators in their own businesses, but they aren’t always familiar with the impact of commercial real estate leases. They don’t fully understand terms such as termination options, right-of-first-refusal for expansion space, moving allowances, and caps on operating expenses. These are concepts that can have a significant impact on your business. A good broker/advisor takes the time to understand your business needs and goals, and how they relate to the lease or acquisition. As a result, he or she is able to help you negotiate the best terms and conditions for your situation. You may think you’re facing just a “simple” lease renewal, but even then, there are as many available concessions and negotiation points as in the initial lease. Renewing tenants are far more profitable to landlords than new ones.
A good broker/advisor has a thorough understanding of current market concessions, comparable rates, and other market indicators. All these help leverage your renewal options if you decide to stay in your current facility. It is also important to understand comparable rates and terms when negotiating a renewal. Business owners may be able to find rates, prices, and availabilities of some transactions on the Internet, but what about “off market” variabilities, typical lease concessions, properties soon to be available, or other myriad lease covenants? Also, I’ve discovered that most of my clients don’t have the tools to prepare a detailed financial analysis of costs associated with each potential option—rent, operating expenses, improvement allowances, moving allowances, etc. For example, if considering a lease renewal option, you should include expansion and contraction costs, as well as the cost of any reconfiguration of your existing work space. In 99 percent of the cases I have seen, business owners’ negotiating their own lease renewals without representation end up wasting valuable time from their core business, and they spend a significant amount of effort negotiating without the tools and knowledge of a well-qualified commercial real estate representative. It just doesn’t make sense, when all of these services are available to the business, at no additional cost. One solution is to consider utilizing the services of a tenant representation (tenant rep) broker.
There is a common misconception that hiring a tenant rep broker costs the tenant extra. In reality, the current industry standard is for the landlord to pay all brokerage fees for new lease acquisitions and renewals. In a majority of all cases, representation will not impact the cost of your lease. Even if you have a great relationship with your landlord, your interests run contrary to one another. A broker representative is positioned to push harder for a better deal than you, as tenant, can achieve because it is an arm’s length transaction. The broker is an effective buffer in preserving that good relationship, you have with the landlord. Remember, you are more important to your landlord than he or she is to you!
An upcoming lease expiration can offer you an opportunity to transform your business through relocation. After conducting your needs assessment, you may consider relocating if growth and market conditions support that option. If your current facility is too small, too large, obsolete, or non-functional, a new facility can provide a great opportunity to increase productivity, eliminate waste, tap new labor pools reduce logistics costs, and increase employee morale. Additionally, market conditions or municipal business development incentives may support the case for relocation. Whether you decide to stay or go, knowledge is key.
Take the time to examine and understand the situation in your current facility. Review all your options and assess the current market conditions to understand the overall opportunity for relocation. The period of time required to select a property, conduct the lease negotiations, and relocate takes a minimum of six months. Depending on the size of your business and the current amount of supply in the marketplace, I recommend beginning the process a year in advance of the lease expiration. For a large business, it can take twenty-four months or more to complete the relocation process.
Deciding whether to stay or relocate depends on the best strategy for your long-term business goals. Each situation is different and requires a thorough and analytical thought process.
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