The cost of the space you occupy is most likely one of the largest expenses for your business. However, you only have an opportunity every three to five years to make decisions regarding the lease that dictates these expenses. Here are six tips to help you achieve the most favorable terms when it’s time to sign a new lease.
1. Don’t procrastinate.
The sooner you begin looking for new space or talking with your current landlord about renewing, the better.
If you have decided to relocate, you will need time to find the right space, negotiate a lease, perform tenant improvements to the space, and move. If you intend to stay, it can be to your advantage to talk to your landlord up to 18 months before your lease ends. As your lease approaches expiration, it has less value to a landlord and may inhibit the ability to sell the property or obtain financing. Landlords generally want leases with the longest term possible and often will be more willing to negotiate on rent if you add onto your lease well before it concludes.
2. Read your lease.
You should be aware of your expiration date and any provisions for written notice that may exist. For example, if you intend to exercise an option to renew you lease, you must notify the landlord in writing a certain number of days prior to the expiration or the option to renew may become void. Additionally, you may need to provide written notice if you intend to vacate the space or holdover penalties may apply.
Also, if you intend to renew, you should check for any terms that are not favorable or no longer reflect the current market.
3. Understand your renewal options.
Check to see if your lease has an automatic renewal option at predetermined rents. Some leases provide for this option but it is up to you to exercise the option. Remember that since it’s your option to renew, everything is negotiable, including the rent.
4. Understand the market.
Before any negotiations, you should have an understanding of current asking rents and occupancy rates for spaces similar to yours in the surrounding area. One convenient source for this information is LoopNet.com, which is a database of commercial real estate listings. It’s free to do a basic search and it can provide you with a summary of nearby spaces available for lease.
5. Understand all the costs.
There are several kinds of lease structures. Shopping centers typically use a “triple net” lease (usually shown as NNN), in which the tenant pays a base rate as well as a proportionate share of real estate taxes, building insurance and common area maintenance. In a “gross lease,” more typically used for offices, the tenant pays a single amount and the landlord is responsible for the building’s expenses. A “full service” lease is similar to a gross lease but usually includes utilities and janitorial services.
Sometimes leases are structured as “modified gross,” in which a base year is established for property taxes and other expenses and the tenant is responsible for paying a share of any increases in those expenses in subsequent lease years.
6. Plan for possible expansion.
Along with your current space needs, anticipate how much space you may need in the next several years. If you think you might need to expand but don’t want to take on additional risk or overhead now, you may be able to negotiate a right of first refusal on vacant space adjacent to yours.