In commercial real estate, there are many aspects that tenants need to be careful of, and one such thing is renewing the lease of the space their business is housed in. Considering that the minimum term for a commercial lease typically lasts between three to five years, but can easily require 10 to 15 years before renewal is up, it’s not a process that happens very often. Thus experience with this process is usually scarce and business owners can easily make mistakes that will cost them money, aggravation and effort.
To navigate through the process of a lease renewal without headaches or regrets, there are four main things you need to be wary of. Keep these in mind and apply them when the time comes and you’ll have more time to focus on growing your business. We’ve described the most common mistakes tenants make when it’s time for a renewal below, and also included these tips in a video you’ll find at the end of this article.
1. Not considering alternatives outside the building you’re renting in
While you might greatly enjoy the space you’ve set your business in, look at a lease renewal from a negotiator’s perspective. Oftentimes landlords are willing to give legal or financial benefits to a new tenant and not offer the same benefits to an existing one. This happens despite the tenant’s feeling that he or she has been a ‘good’ tenant who paid their rent on time, didn’t make any complaints, and so on, and so they expect the landlord to take this into account and offer said incentives. Unfortunately, in most cases, this doesn’t happen. Why? Because the landlord is aware that finding a new location, negotiating a new lease and moving to a new space causes disruption to the tenant’s business. In short, the landlord bets on the tenant taking the path of least resistance.
However, things are pretty similar going the other way, as it is much more expensive for a landlord to replace an existing tenant than to retain one. So, be aware of that and use it to your advantage – get out of the building you’ve been in and look around for other options. Make sure you also tell your landlord you’re doing so, as they will be well aware of the market and the costs and incentives offered by other landlords in the area.
2. Waiting until the last minute to negotiate your renewal (or look for another space)
It’s incredibly important to plan in advance, and ideally, you should start thinking about your lease renewal a year before. That gives you plenty of time to check the market yourself or hire a qualified professional to help you with your search, or guide you in the renegotiation process. There are specific niches, such as medical office, startup office space or showroom space, which require very elaborate build-outs as well as permits and construction. These processes alone take time. Add to that negotiation business terms and lease terms that come with a new space, and if you don’t start negotiating or looking for spaces early, you might run out of time and be stuck with whatever deal the landlord wishes to give you.
3. Considering only the monthly rental number
While money is at the center of any negotiation, it’s not the only important factor you should be looking at. Depending on the market you’re in, things can differ. For instance, if you’re in a market that’s favorable to tenants, the price per square foot might have dropped during the initial lease term. But that’s not all; in some markets, landlords can give you either some free rent, or bring some upgrades to the space you’re leasing from them, and a revamp is always welcome. Another important component of the lease you can negotiate with your landlord when your lease is up for renewal is the annual rent escalation, which is the amount that comes in addition to the base rent. Consequently, you want to consider any potential extra costs and think of what your monthly rate will amount to years from now, and not fixate on the base rent exclusively.
4. Not hiring a real estate broker to help with the renewal process
The first thing that comes to your mind reading this point is, probably, that a broker costs money. While that is true, keep in mind that brokers have the experience and knowledge in their profession you yourself have in your own line of business. A broker will know the market you’re in, the available inventory, what deals are currently on that market and what concessions landlords are willing to offer at that specific moment in time. The broker will be able to use that knowledge to your advantage for the longer run. Your relationship with your landlord has a longer timespan, so what you get at the lease renewal will partly determine the next few years of your business’ life. One more thing, don’t consider the landlord your adversary, but rather your business partner. And just like in any business, each party wants what’s best for them, both you and your landlord. Be prepared and make the most of this relationship.
Check out some more tips on how to avoid making these common mistake in your lease renewal process, in this video by Metro Manhattan Principal Broker Alan Rosinsky:
Are you thinking of setting up your business in a convenient location in Manhattan, and are looking to lease space in a modern building offering state-of-the-art amenities? Then reach out to us and we will show you worthwhile space situated right in the heart of New York City. To learn about available office space, call Metro Manhattan Office Space at (212) 444-2241 or email us at [email protected]