Frequently considered as more of a stepchild to the terms negotiated for the premises you seek to lease, expansion opportunities should be considered as one of those key terms that jumps to join his real brothers and sisters at the beginning of the negotiations and carefully crafted in the lease document.Working from the standpoint of your needs assessment and criteria and your view into the future of your business, only you can understand what circumstances you expect to occur, and what goals you have for your business.Dividing up your company into parts which you can more definitively get a feel for, consider each element as its own line of business with its own growth or contraction needs.One would assume that if it is your interest to generate greater and larger sales over the next three, five or ten years, consider constructing how you will achieve this in relationship to how these functions will be housed. Increasing sales ten percent per year means what?Can this ten percent increase the performed by your existing staff?How many people will be required to expand your core business?How many people will the required to expand to new customers or to push into new lines of business? Accordingly, as this requirement for additional square footage grows to accommodate more employees, so too does this affect other areas. Does your goal of increasing sales increase customer service or administrative functions?Does your marketing group need to generate those new sales?
While the architect can reasonably develop compatible adjacencies of all your business functions such as sales, administration, marketing, human resources, operations, and finance you have to give him or her the directions to understand this growth and relationship.
The initial square footage you see in the real estate market therefore is really only the first stage of many in your growth plan.Cementing oneself into a fixed or finite box of square footage with the knowledge of your anticipated growth is fine if that square footage can, in fact, accommodate your growth in it. That is programming. Where the limits get reached and burden develops is where expansion thinking should become a plan.If this happens you must then consider the burden to you financially and otherwise of not growing.
Lesser sized tenants finding themselves between several larger tenants know well the pressure of the likelihood at their lease expiration that they will be required to relocate in order to accommodate the other tenants.Having no option but to move out or relocate within the building will have a high financial impact on your profit and loss when you are forced to capitalize the cost of a relocation you really didn’t necessarily want.So, for the sake of preventing unnecessary future costs, good expansion right provisions will do just that. Bringing expansion onto page one of your financial requirements also provides the landlord with the knowledge of your expected growth and stability.
Conversely, day one in landlord school has taught landlords that expansion options can be a pain to manage. Many landlords find it difficult to manage the varying expansion rights of different tenants and the requirement to provide notices to tenants of the availability of space.Occasionally a tenant will forget the date of their expansion option also.
Securing additional area compatible with your programming can take a few forms: 1) hope there is square footage or 2) know there will be square footage when and if you need it.Formalizing expansion into rights can take a few forms: 1) An outright agreement to take a certain square footage on a certain date, 2) A Right of First Refusal, and 3) a Right of First Offer.
You may also consider any multiple of these expansion rights.For example, you can secure a fixed option to lease the adjacent 2,000 square feet at the 30th month of the lease, have a Right of First Offer on another area, and a Right of First Refusal on yet another.Thought out carefully, these can be adjacent or elsewhere in the building.
Forget the monkey on the back of the landlord (which he or his agent or property management will surely verbalize). Forge ahead and pin these down.
While expanding any new area into your existing lease will dove-tail all the lease terms in to it, several terms particular to the expansion spaces must be tailored, such as what form of rent will be charged, what the condition of the expansion area will be and what the tenant improvement allowance will be from the landlord necessary to make the new area compatible to your use and design.An expansion area that is unusable to you without the landlord’s contributing money to modify the space only guarantees you the expense.If the space were to remain unoccupied, then a complete Tenant Improvement Allowance such as you negotiate for the initial area, plus increases for time, is appropriate.If the expansion area is completely unusable to you in that format, then additional cost must be negotiated to demolish the existing improvements.Rent should be negotiated on each of these expansion alternatives also.The best being that you have predetermined the exact rent, the opposite being at a fuzzy market rent.If you are going to expand into a 10,000 square foot area at a market rent determined only by holding a finger up to the wind when the landlord is actively leasing space in the building with competitive leasing terms, such as free rent why should you not benefit from these things just because you are the landlord’s bird in the hand.
Nothing contained herein is to be considered legal advice. Always seek legal advice when evaluating any legal document
