Renewing commercial real estate lease agreements requires careful attention to detail as they are complex. Tenants have various aspects to consider. Especially when the minimum term for an office lease typically ranges from three to five years and can extend up to 10 to 15 years before renewal is due.
Due to the infrequency of lease renewals, many business owners lack the necessary experience. This fact can result in mistakes that can cost time, energy, and money. To avoid these headaches during the lease renewal process, watch out for four common mistakes. By staying vigilant about these mistakes as the renewal deadline approaches, tenants can better focus on growing their business.
We will explore all four common mistakes in detail in this article. Additionally, we have included a video at the end of this article to provide more insight, context, and guidance.
1. Limiting Yourself to Your Current Building
Regarding office lease renewals, tenants should approach them from a negotiator’s perspective, even if they are happy with their current space. Landlords often offer new tenants legal or financial benefits rather than existing ones.
Even though tenants may believe that being a “good” tenant by paying rent on time and refraining from complaints should count in their favor during lease renewal, landlords may not necessarily consider this. Landlords know that finding a new location, negotiating a new lease, and moving can cause significant disruption to a tenant’s business. Therefore, they may give less weight to a tenant’s past behavior than to other factors, such as the rental market conditions and the overall value of the tenant’s business to the property. Therefore, tenants must always prepare to negotiate and demonstrate the value they bring to the property. Doing so can increase their chances of securing favorable lease terms and avoid being taken for granted.
However, the reverse is also true. It is more expensive for landlords to replace existing tenants than to retain them. Thus, tenants should be aware of this and use it to their advantage by exploring other options. It’s crucial to inform the landlord of this plan as they are knowledgeable about the market and the costs and incentives offered by other landlords in the area.
2. Waiting to Negotiate Your Lease Renewal or Find a New Space
To ensure a smooth office lease renewal process, always plan ahead. Ideally, tenants should start thinking about their lease renewal a year before the current lease expires. By starting early, tenants have ample time to explore the market themselves or hire a qualified professional to assist them with their search or guide them through the renegotiation process.
Some niches, such as medical offices, startup office space, or showroom space, require extensive build-outs, permits, and construction, which alone takes time. When you factor in negotiating business and lease terms for a new space, time becomes even more critical. To avoid being forced to accept whatever deal the landlord offers due to running out of time, it’s important to start negotiating and searching for spaces early on. Planning in advance will provide enough time to secure the best possible lease agreement. Be proactive and start the process early to ensure the best outcome for your business.
Therefore, tenants should aim to start the office lease renewal process at least a year in advance to avoid being rushed or pressured into a suboptimal deal. This lead time allows tenants to thoroughly assess their needs and priorities, explore different options, negotiate effectively, and secure the best possible deal. In addition, an early start will provide enough time to complete any necessary build-outs, permits, or construction before the move-in date, ensuring a smooth transition to the new space. This additional time will also help to avoid any last-minute stress or delays. Furthermore, completing these tasks in advance can prevent other expenses and allow for negotiating favorable terms with contractors and suppliers.
3. Failing to Consider Costs Beyond Monthly Rent
Negotiating a lease renewal can be a daunting task, especially when you consider the numerous factors involved. As a tenant, think beyond just the rental price per square foot and evaluate all the incentives landlords can offer. In some markets, landlords may reduce the rental cost during the initial lease term. However, in other markets, they may provide free rent or upgrades. A refreshed and modernized space can improve not only the aesthetics of your office but also boost employee morale and productivity.
Apart from rental prices, paying attention to the annual rent escalation rate is crucial. Rent escalations can impact your expenses in the long run. Moreover, they add to the base rent and can significantly increase your monthly payments. Therefore, it’s vital to evaluate any additional costs, such as maintenance, utilities, and other fees, that may come with the lease agreement. Understanding these costs can help you budget your future expenses and make an informed decision about renewing your lease.
4. Not Hiring a Real Estate Broker for Office Lease Renewals
Many people need to pay more attention to the value of working with a broker regarding lease negotiations. It’s easy to assume that a broker will only add to the cost of the lease. However, the truth is that brokers can offer invaluable expertise and knowledge that you may not possess. A skilled broker will deeply understand your market, including available inventory, current deals, and concessions that landlords are willing to offer. By leveraging this knowledge, you can secure a lease better suited to your needs and goals in the long run.
It’s also important to remember that your relationship with your landlord is crucial. The outcome of your lease renewal can impact your business for years, making it essential to approach negotiations as partners rather than adversaries. Both you and your landlord have your interests to protect. So come to the table prepared and ready to work towards a mutually beneficial agreement.
The Key Takeaway
Renewing a commercial real estate lease agreement is a multifaceted process that demands meticulous attention to detail. Tenants must exercise vigilance to avoid common errors that may waste time, energy, and money. To guarantee the best possible deal for their business, tenants must approach lease renewals from a negotiator’s perspective, plan ahead, consider costs beyond monthly rent, and work with a real estate broker.
Taking a negotiator’s perspective implies that tenants should adopt an assertive approach and ask for what they want. It is critical to recognize that the landlord is also in business and may be receptive to negotiations that benefit both parties.
Furthermore, considering costs beyond monthly rent involves examining additional expenses such as insurance, taxes, and maintenance fees. These expenses may seem insignificant but can add up over time. Finally, working with a broker can provide valuable insight into the commercial real estate market and assist in negotiations.
Tenants should remember that the outcome of their lease renewal can have a lasting impact on their business. Therefore, it is imperative to take the time to do it right.
For more tips on how to avoid common mistakes during the lease renewal process, watch this video below from Metro Manhattan Principal Broker Alan Rosinsky.
Are you looking to set your business up in a prime New York City location? Are you dreaming of a modern building with state-of-the-art amenities? Contact us. We’ll show you a worthwhile space that fits your business needs. To learn about available office space, call Metro Manhattan Office Space at (212) 444-2241 or email us at [email protected].