Making smart preparation for renewal of your lease
If you own a business or are otherwise largely responsible for your company’s financial performance, it is vital to understand the terms of your commercial lease agreement. Is your lease NNN or modified gross? Who is responsible for fixing your heater or air conditioner if it breaks? Could you be in default of your lease for not having maintained a service contract on that heater or air conditioner? There are many important terms in your lease, but probably the most important is also the simplest: the expiration date. Do you have an option to renew? Is there a stated rental rate for your renewal, and when must you exercise that option? How does the rent you’re paying compare to the somewhat nebulous “market rate”? Here is a brief overview of the lease renewal process.
How does the process start? It starts with knowing and setting a reminder for key dates in the lease. If you have an option to renew, it will likely state the timing involved in exercising the option, typically 3 to 6 months prior to the end of the term. Set your reminder for at least three months before you must give notice to your landlord. That means that if you have to exercise your renewal option six months prior to lease expiration; you should begin this process at least nine months before the termination date. It’s unlikely your landlord will notify you when your option is about to expire, particularly if you have a right to extend at a rental rate that is less than the market rate … which brings us to No. 2.
How does your rent compare to “market rent”? You need to ask this question even if you have an option at a stated rate or if the lease reads something to the effect of “rent shall be market rate, but in no event less than $_____.” The rent can always go down when the term is up — if you have a right to leave, you have a right to negotiate. This is where the research begins. Obviously you have to reasonably determine what a market rate is in order to compare the two. You can call around to similar properties (or search online) to see what their asking rents are, but sometimes there will be a significant difference between the “asking rent” and the “actual rent,” and even beyond that, there can be a big difference between the rent a landlord will give a new tenant vs. the rent they will give a renewing tenant. Getting this information can be a bit more complicated, as you’ll have to call around directly to tenants. Landlords and their brokers typically will not volunteer this information. Conversely, and advisably, you can engage a commercial broker to represent you as a broker will have easier access to the information above. If you used a broker to represent you when initially leasing the space, calling them is good place to start; otherwise this is a service that any good commercial real estate brokerage can provide. There should not be any cost to you as broker fees are typically paid by the landlord.
Do you want to renew where you are or consider relocating? Is your current space going to allow for your growth projections over the next three to five years? Is it in the right location? Could you save money by downsizing or going to a more economical building? These are the questions to ponder as you determine whether to stay or go. Regardless of your desire to relocate or not, as in any negotiation, your viable alternative options, or the appearance of such, will largely determine your negotiating power. Whether you truly intend to move or not, you need to know where else you could go if your landlord doesn’t play ball. This is closely related to the research above. Beware of bluffing too much if you don’t actually intend to follow through on a relocation. The market is picking up a bit and you don’t necessarily know the cards the landlord is holding. He may think he can get a higher rent by replacing you. A savvy broker will be able to advise you if the market for your space is getting too hot to expect the landlord to bend to your will.
If you stay, the process is fairly straightforward once the economic terms are negotiated. While it’s never a bad idea to engage your attorney, you already did your homework on the lease document the first time around, now it’s typically a one page addendum that states “everything in the lease stays the same except …”
If you go, the process will take some time, which is one reason why it’s important to give yourself plenty of time to evaluate the situation, determine the right course of action, and follow through. Identifying space, negotiating a deal, reviewing the lease, and performing necessary construction can be a complicated and lengthy process. Try to allow six months for this at a minimum. Give yourself more lead time if you know the tenant improvements you need will be extensive, if you have very specific space requirements that may be difficult to find or if you intend to purchase a property.
I wish you all continued success. With the collective efforts of our business community, life in Northern Nevada will only continue to improve!
Adam Wexelblatt is a senior associate in the industrial and investments group at Colliers International. Contact him at 775-823-6630, or Adam.Wexelblatt@Colliers.com.
The rate effective Jan. 1, 2020, is 1.65 percent of wages paid to employees. That is two-tenths of a percent lower than the current rate, giving a significant break to businesses that pay the tax.