LEASE COMMENCEMENT DATE IS NOT TIED TO BUILDING COMPLETION
NOT ALLOWING ENOUGH TIME
Facility research, property inspections and comparison
analysis can usually be completed in a week or so by motivated companies
already familiar with the local market. However, those tasks are only the tip
of the "time drain" iceberg, and several commonly overlooked complications
needing to be factored into the relocation timeline:
Negotiations with the Landlord and preparation of
the lease can take weeks, (even months).
Once the Lease is signed the interior usually needs to be
finished or renovated, which can take one to two months.
Before renovations can begin, building permits need to be
obtained which can take one to two months, and more.
Before permits can be obtained, architectural plans must
be completed, and may take one to two months.
If existing facilities cannot be found which are
acceptable, new construction can easily take 9 to 12 months or longer.
Bottom line: 6 - 12 months is a good time frame to use when
looking for new facilities, even longer if experienced professionals are not
used to guide the process. This assumes the space is not going to be taken
as-is, which is possible, but unlikely.
NEGLECTING LONG-TERM PRIORITIES
Owners who think only about solving immediate needs face
expansion problems very soon again! In addition to evaluating short term needs
relative to square footage requirements (number and size of rooms), type of
floor plan (open, private, or a mixture), communications needs, parking needs,
access and security needs, etc., be sure to factor in long term needs. By
obtaining facilities and lease terms which will allow the company
to expand, downsize or relocate as circumstances dictate, business owners can
avoid the unnecessary headaches, loss of business and costs associated with
relocating. Examples of such important lease clauses include:
Expansion right obligates the Landlord to provide
Tenant with more space should it become necessary.
Cancellation right (commonly referred to as a "kick-out" clause) allows the Tenant to break the lease under certain
conditions such as when the Tenant needs to expand and the Landlord cannot
provide them additional space on the premises.
Extension right is similar to an option, and
allows the Tenant to remain in the premises (a right of first refusal is a type
of extension right).
Sublet right gives the Tenant flexibility in that
if it must relocate, it may sublease the space and mitigate the economic
pressure.
Suggestion: After discussing the company's
immediate needs and long terms goals with senior management in all departments,
meet with leasing experts and space planners/architects to determine the most productive combination of office size and
layouts (modular furniture, hoteling, size, amenity requirements, etc.), facilities which are flexible enough to service future
needs, and certain lease clauses which will be negotiated into the lease
document.
INADEQUATE REPRESENTATION
Unless someone in the company is already an expert in
commercial real estate, most business owners cannot afford the time necessary
to learn this complicated industry. Lack of knowledge combined with time
pressures can cause unrepresented owners to a) make location decisions without
being aware of ALL the choices, and b) make costly errors that cut into their
profits and increase their financial exposure.
An experienced and specialized Tenant Rep counterbalances the Landlord's
professionals, and will insure that the Tenant receives the best possible
rates, terms, incentives and lease clause protections. Incredibly, this
valuable service may cost the business owner nothing, since Tenant Reps
usually share in the Leasing fees paid by the Landlord.
Using the wrong broker may lead to incomplete
information, or conflicting loyalties because of hidden agendas or Landlord
relationships.
Note: Business owners who do not use a Broker will likely
not be aware of all the possible facility choices. This is because an
experienced Tenant-Rep broker has developed an extensive network, and commonly
finds facility choices which are not yet vacant or on the market.
Suggestion: Tenants should also keep their broker involved
in the expansions, contractions, renewals and extensions that occur during the
lease to prevent uninformed decisions that lead to lost opportunities.
LEASE COMMENCEMENT DATE IS NOT TIED TO BUILDING COMPLETION
This has been a disaster for many inexperienced Tenants
who found that unexpected delays in the planning, permitting and construction
stages ate into their rent-free build-out period and caused budget nightmares.
Suggestion: Tenants should always propose a clause to the
lease which provides for an extension of the lease commencement date if
pre-opening delays are encountered which are beyond the control of the Tenant.
Your professional can suggest some good lease language.
UNDERESTIMATING THE CONDITION OF THE PREMISES
Tenants who take a property "as-is" put themselves at
great risk. Even when the space looks fine and has been previously occupied,
building codes may have changed or the unit's infrastructure may be broken or
inadequate.
Suggestion: It is best to have the Landlord guaranty the space is up to current
building, fire, safety, zoning and ADA codes. It is also good to have the
Landlord guaranty the condition of the electrical, plumbing, heating and
air-conditioning systems for the first 60 to 90 days (if not the entire term of
the lease).
USING THE LANDLORD'S PROFESSIONALS
Tenants should use architects, general contractors and legal
counsel under their control to create and review the various space plans,
specifications, costs and documents. Otherwise, Tenant may receive inferior
designs and/or fixtures that are less efficient and may dramatically increase
yearly operating costs.
MISUNDERSTANDING THE TRUE SPACE COSTS
Business owners who are inexperienced with commercial real
estate are often unable to perform true "apples to apples" analysis when
comparing different facility choices. It can be complicated, even for the pro,
to compare the different lease types such as: Full Service, Gross, Semi-Gross,
Net, Triple Net, etc. Additionally, each Landlord's interior finish levels,
Tenant Improvement (TI) contributions, lease incentives and a myriad of other
factors need to be part of the comparison equation. This confusion leads many
owners to make less than optimum decisions.
PAYING TOO MUCH RENT
Companies which do not obtain accurate, current market
research may pay too high a rental rate. Landlord "flexibility"
changes constantly depending upon many factors including current occupancy
rates in both their building and the competition, lease length, tenant's use,
parking requirements, financial strength of tenant, etc. Negotiations are
especially important with lease renewals, since Landlords are most competitive
when the space is placed on the open market.
NOT ENOUGH LANDLORD INCENTIVES
Due to a lack of experience, Tenant did not obtain as many
incentives as they might have been able to negotiate. Typical incentives
include periods of free rent both before and after lease commencement,
discounted rent for various time periods, Landlord contributions to tenant's
build-out costs, landlord improvements to the space, limits on future rent
increases, etc.
NO OUTSIDE INCENTIVES
When a company relocates it may be possible to obtain
substantial economic incentives from local government. These incentives include
tax rebates, relocation assistance, payroll subsidies during employee training,
infrastructure improvements and others. Many times the statutory incentives can
be negotiated up very substantially, and an inexperienced company may leave
millions of dollars on the table.
Suggestion: Use an experienced "location analyst & incentive
negotiator" to make sure you obtain the best incentives possible.
Source:
Survey of the INTERNATIONAL TENANT REPRESENTATIVE
ALLIANCE
Compiled by Craig Melby, CCIM, SIOR Copyright
ITRA
