The following presents tenant mistakes 6-10 from the International Tenant Representative Alliance’s “Top Ten List” (provided by Tenant Rep. Gregory P. Schenk, SIOR; CCIM of the Schenk Company in Columbus, Ohio) as well as additional lease items for tenants to look out for.
6th
Most Common Mistake
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.
7th
Most Common Mistake
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 Landlords 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.
8th
Most Common Mistake
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 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.
9th
Most Common Mistake
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.
10th
Most Common Mistake
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. Recently we helped a fast growing company get an additional half million dollars in city and State incentives that they wouldn’t otherwise have received.
Suggestion: Use an experienced “location analyst & incentive negotiator” to make sure you obtain the best incentives possible.
OTHER COMMON
LEASE NEGOTIATION & SITE SELECTION MISTAKES
TENANT PERFORMS THE BUILD-OUT
It may be better to have the Landlord perform actual build-out work, so that unexpected problems or delays will be the Landlord’s cost.
When it is appropriate for the Tenant to perform the build-out, have the lease provide for an extension if delays are encountered which are not the fault of the Tenant, and extra Landlord monetary contribution if unexpected repairs are required (termites, code violations, etc.).
NO LIMIT ON PERSONAL GUARANTY
Many times it is possible for the Personal Guaranty to expire “x” months after lease commencement, or provide a specific dollar amount of guaranty. Although not as beneficial, it may be possible to use an “Evergreen Guaranty” which provides that Tenant will personally guaranty a set number of months or years, commencing upon default by Tenant. Your professional will know what is typical for your market.
LIMIT ON FUTURE FLEXIBILITY / COMPANY GROWTH
How fast is the company going to grow? Will it be necessary to downsize? How likely is a new partner or merger? These situations, and more, indicate the Tenant’s need for as much flexibility as possible. Tenants should work with experienced professionals to insert language into the lease which will allow a cancellation or modification of the lease under certain circumstances.
LIMIT ON FUTURE FLEXIBILITY / PRODUCT GROWTH
Will the company want to carry a new product line or install a new technology? Will a neighboring Tenant vacate (or move -in) which impacts the business? Tenants should be cautious with their “Use Clause” since these clauses can be very specific as to what goods and services the Tenant will provide, and may prevent a Tenant from offering a very lucrative product or service in the future which has not yet been invented!
CHOOSING THE WRONG LOCATION / TURNING MARKET
Tenants who do not know the local market may locate into a declining area, making it impossible to hire and retain the highest quality employees.
CHOOSING THE WRONG LOCATION / PENNY WISE AND POUND FOOLISH
Retail tenants who choose locations in unanchored properties to obtain lower rental rates. Traffic and subsequent sales volumes are dismal, and tenants fight a loosing battle.
HAMSTRUNG BY YESTERDAY’S TECHNOLOGY
The office building is not set up with the newest in telecommunications and data cabling, such that Tenant cannot benefit from today’s technology. Business is lost to competitors which can offer better service to clients.
TAKE TOO MUCH SPACE
Tenant did not use their own space planner and leased offices which were too large or had an inefficient floor plan.
SPACE WAS MEASURED INCORRECTLY
Tenant did not verify the Landlord’s dimensions and figures and paid rent on “phantom” space.
UNNECESSARY SECURITY DEPOSIT
Landlord asks for Security Deposit as standard procedure, but does not require one depending upon Tenant creditworthiness and/or build-out requirements.
NARROW SEARCH
Tenant limits its geographic area of interest too severely, and does not complete adequate market education resulting in lost opportunities.
HOLD-OVER PENALTY IS TOO HIGH
Standard hold-over penalties in first draft lease agreements are typically far higher than necessary.
NOT REVIEWING THE LEASE OFTEN ENOUGH
Tenants miss notification dates, resulting in automatic renewals, loss of option period, or other penalties.
POOR DESIGN
Tenant made poor choices during interior design stage because of focus on “least initial cost” instead of “lifetime operating costs”. Many times upgraded lighting, windows; insulation, etc. can make very dramatic improvements in employee productivity, operating costs, and business security. Your professional should be able to discuss the latest in facility design, materials and technology.
POOR PLANNING
Natural catastrophe occurs and electric power is lost for an extended period of time. Tenant is out of business, and loosing clients at a rapid rate. Proper planning and/or design can lessen the impact of potential business disasters.
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Thanks again to Gregory P. Schenk, SIOR, CCIM. The Schenk Company’s “Competitive Edge” puts on seminars and courses, nationwide; authors articles which have appeared in many national publications; and has been the featured speaker at conferences for National SIOR, National Assoc. of Realtors, Ohio Society of CPA’s , Bar Associations, various banks, law firms and medical associations. Greg holds many honors in the industry, including: the 2006 Micro Entrepreneur of the Year award for real estate in Central Ohio; featured broker in Costar Magazine’s “Top Power Broker of 2004”, and “Midwest Real Estate News “ 2003 & 2002 top 50 Midwest Brokers”. For more information, Greg can be contacted at: The Schenk Company, Inc - 1350 W Fifth Ave,- Ste 224- Columbus, Oh 43212 - Phone: 614-487-1972 - E-mail: Greg@irepthetenant.com
2 comments :
I was very pleased that I was able to read your article and acquire those very informative ideas that would help me on my negotiation activities. Your feed is explicitly versed and it's really very useful. Thank you so much for this vast information.
It is important to reach a negotiation that is fair and achievable by both parties. If this is your first time to run your very own business and you would like to get a great deal for your business' office.
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Read the renewal agreement very carefully and see if you are being treated fairly. Looking for the st location for your business' office is not easy, especially if your options are too pricy.
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