You are a business owner with barely enough time in the day to run your company and remember to eat lunch, much less worry about real estate. Someone on your staff reminds you that your lease will be expiring in a few months, so you start to think about what that will mean. Mostly, your current space works for you. Maybe you could use more space, the carpet needs replacing and the paint is starting to chip- but ultimately it works. You are comfortable and let’s face it, moving is a hassle!
Even though the idea of packing up an office full of files, years of business supplies and a growing number of forgotten Tupperware in the break room makes you grimace, you can’t help but notice all of the “Available Space” signs in some pretty nice buildings during your daily commute.
So, you call some of them only to discover that although there is a sign in front of the building, there isn’t any space that fits your needs, and the rent isn’t tempting enough to take on the dreaded move. It all becomes a little overwhelming, and soon you contact your landlord to ask him if you can renew your lease. He says, “Sure, I’ll send you a simple lease amendment. Just sign it, and you’ll be good for the next five years.”
You have taken the path of least resistance.
It’s a done deal and you don't have to think about it for another 5 years.
You read the amendment and notice that they are going to repaint your space and drop the rent a few cents per square foot. That’s certainly a nice bonus however you can’t help but wonder if they are really giving you a “market” deal. Still, you’ve have your business to run, so you sign it. Your lease goes back into your landlord’s file until the next renewal and you succumb to looking at the outdated carpet for the next few years.
You are a landlord’s dream come true!
You may have saved some time, but it came at a price – usually 20% to 40% or more in occupancy costs. In addition, there’s both short and long term legal and economic exposure, that if you knew about, would most likely cause you to not to renew your lease.
Here are just a few of the items that you might have missed:
1. Lower Rent
Those continued escalations over the past years have caused your rent to be above market for comparable space
2. Free Rent
Most submarkets are seeing as much as 1 month free for each year of the lease term.
3. Improvement Allowance
New carpet, paint, add or remove offices, lighting upgrades, HVAC, etc.
4. New Base Year
For real estate taxes and other operating expenses- limiting which expenses are even allowed, can increase, and/or be added to future years.
The ability to expand or contract your space and renew or terminate your lease early.
Also, and most importantly, there are Hidden Profit Centers in your lease that increase your rent!
1) Incorrect measurement of your space and the building common areas.
2) Operating expenses with no limits.
3) Your share of the property tax increases due to the sale of the project.
The clauses in your lease are usually more important than the economics of the deal itself, and many times it would save you money to have a higher rent, but better lease clauses.
If your rationale is that your landlord would not want your broker involved, you are 100% correct. Read the points above again and you'll understand why. And also it’s not just because your landlord doesn’t want to pay a broker’s fee. Landlord rents include paying a broker commission already. It’s primarily because many of the countless economic deal points and clauses in your lease (that you are not equipped to negotiate) are profit centers for the landlord. So, by not using a broker, the landlord is profiting on you not understanding the complexity of your lease.
But keep in mind…
Not all real estate brokers are created equal.
Many brokers and real estate attorneys don’t even know where all of the hidden lease profit centers are. Just finding a location and negotiating the basic economic terms of a deal isn’t in your best interest, and will end up costing your more in the long run. The importance of having proper representation when you renew or relocate your offices is that an experienced broker knows the ins-and-outs of leases, so that none of your money is lost in what is hiding, or what you don’t know.
A broker knows what you don’t.
Want to continue the conversation? Contact me directly at (949) 263-5303 or ChrisD@voitco.com