Friday, July 8, 2016

Common Leasing Mistakes to Avoid

Choosing and negotiating location is one of the more vital decisions most businesses will make. For those electing to go through the process without an agent representing your interests, there are a few "gotcha's" to be aware of.

Before considering these points, it's important to consider the reasons that this decision is vital.  A business's space significantly impacts expenses, image, workflow and collaboration, employee safety, growth strategies and more... pretty important stuff.  Pick wrong and you're exposed to any combination of these issues. Pick right and your space can be a tool to help accomplish your goals.

Mistake #1: Procrastinating
Done right, space selection and/or lease renegotation always takes longer than expected. For a relocation, 6 months is the minimum time needed. 12 months is even better. Searches, tours, offers, contracts, space plans, construction drawings, permits, contstruction, etc.. these things add up!

Can a renegotiation or relocation be done less than 6 months before expiration? It can, but it will never be to the tenant's benefit. The tenant will lose leverage with their current landlord, the process will be MUCH more disruptive to their business, the list of possible destinations shrinks considerably, and there's a very real possibility of having to pay holdover rent (150%-200% of contract rent) at the current location.
Mistake #2: Not checking all options
When thousands - or tens of thousands of dollars - are at stake every month, it's worth the time to consider all viable options. There may be properties that haven't yet hit the market, properties where the owner hasn't put out a sign, or particular owners that are very prone to negotiate.  And the review process will yield options that provide leverage.  Since your business will likely be in this space for years, it makes sense to be sure you're getting the best space at the best price.

Mistake #3: Technology Assumptions
Technology-reliant organizations take note: It is NOT safe to assume that fiber-based services or robust power are available at all properties. I can name several companies who signed leases and then got very rude awakenings when they went to order their high-bandwidth service. Ironically, these companies' leaders all became clients on subsequent transactions.  During the transactions I ran, we knew before touring which buildings were "lit."

Mistake #4: Not knowing the market
Is $21.00 per SF a good rate for Class A office in midtown Atlanta?  What if the landlord tells you you're getting a great deal and that the last lease they did in the building was at $26.00 per SF ?  Sounds pretty good, huh?  But what if that lease they're referring to included $250,000 in space improvements that the landlord funded and then amortized into the rent rate?  And what if the deal before that one was at $19.00 per SF?  Market knowledge is critical to getting the best deal, whether it's Class A office or a light industrial space in the suburbs.

Mistake #5: Overlooked costs
What's a better deal, $12.00 NNN ("triple net") rent or $16.00 FSG ("Full Service Gross")?  There are numerous ways to allocate the expenses that go into running a property, and it's critical to understand what is included/excluded in any pricing quotes.  It's rare for a tenant to sign a lease and THEN find out about the extra monies.  But it's not so rare for a tenant to get fairly far down the path before discovering that not all of the costs had been disclosed... and that the tenant has wasted time on a property they would not have otherwise pursued.

Mistake #6: Asking for too little
Similar to mistake number 5, this mistake manifests when an owner doesn't consider all of the moving parts in a transaction. It's a balancing act, but possibilities include free rent, repair stops, tenant improvements, rate reductions or abatement, escalation reductions, signage, after-hour AC, parking spaces... and on and on.

Mistake #7: Reaching out Prematurely
This one is not universal, but warrants inclusion for a select group.  I've worked with several early stage companies and pre-revenue companies over the years.  Know that landlords typically will not allow a tenant to occupy space until funds are in hand or there's an adequate revenue history.  Certainly, research is necessary to build a business case, but a more efficient way to get this information is to call someone (a tenant representative) who knows the market.  In most cases, days worth of work will be condensed into a single phone call.

For those do-it-yourselfers out there, I hope this is helpful.

One other point: If you're doing it yourself to get a better rent rate, you may not be saving the money you think you are.  When a property is listed with an agent, the owner has already contracted to pay leasing fees whether you are represented or not.  If you're unrepresented, the leasing agent keeps all of the fees.  If you bring a tenant representative, your representative and the leasing agent will share the leasing fees.

Here's to your success!

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