Top 10 Lease Negotiation and Site Selection Mistakes

The following “Top 10” list of common mistakes (1-5 will be re-produced today; 6-10 will appear shortly thereafter) is the result of a survey taken among members of the prestigious International Tenant Representative Alliance. Alliance participants drew from double digit years of Tenant Representation experience, advising commercial tenants with hundreds of leases totaling millions of square feet in most major U.S. markets. We thank Gregory P. Schenk, SIOR; CCIM of the Schenk Company in Columbus, Ohio (Central Ohio’s only commercial real estate firm specializing exclusively in Tenant/Buyer representation), for lending us his 22 years of experience and this insightful and valuable “Top Ten List".

Common Mistake


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:*

1) Negotiations with the Landlord and preparation of the lease can take months.
2) Once the Lease is signed the interior usually needs to be finished or renovated, which can take several months.
3) Before renovations can begin, building permits need to be obtained which can take up to two months, and
4) 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 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.

Most Common Mistake


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 a) the most productive combination of office size and layouts (modular furniture, hoteling, size, amenity requirements, etc.), b) facilities which are flexible enough to service future needs, and c) certain lease clauses which will be negotiated into the lease document..

st Common Mistake


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 leaving valuable dollars on the table during negotiations to renew a lease or relocate to lease, purchase or build...
An experienced and specialized Tenant Rep can counterbalance the Landlord’s/Sellers professionals, and will work to insure that the Tenant receives the best possible rates, terms, incentives and lease clause protections. This valuable service may cost the business owner nothing, since Tenant Reps split the Leasing fees paid by the Landlord or Seller.
Using the wrong broker may lead to incomplete information or conflicting loyalties because of possible 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 broker has developed a databank of every property on the market, 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.

Most Common Mistake


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 broker and a good real estate attorney can suggest some good lease language.

Most Common Mistake


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, environmental laws and 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 90 days (if not the entire term of the lease). Often, a dollar threshold for repairs/replacements to older systems can be negotiated.

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