TEN MOST COMMON MISTAKES MADE BY
COMMERCIAL TENANTS AND BUYERS
1st Most Common Mistake:
NOT ALLOWING ENOUGH TIME
Facility research, property inspections and comparison analysis can usually be completed in a week or so by motivated companies already familiar with the local market. However, those tasks are only the tip of the “time drain” iceberg, and several commonly overlooked complications needing to be factored into the relocation timeline:
- Negotiations with the Landlord and preparation of the lease can take months;
- Once the Lease is signed, the interior usually needs to be finished or renovated, which can take several months;
- Before renovations can begin, building permits need to be obtained which can take up to two months; and
- Before permits can be obtained, architectural plans must be completed, and may take one to two months.
If existing facilities cannot be found which are acceptable, new construction can easily take 12 months or longer.
6 – 12 months is a good time frame to use when looking for new facilities, even longer if experienced professionals are not used to guide the process.
2nd Most Common Mistake:
NEGLECTING LONG-TERM PRIORITIES
Owners who think only about solving immediate needs face expansion problems very soon again! In addition to evaluating short term needs relative to square footage requirements (number and size of rooms), type of floor plan (open, private, or a mixture), communications needs, parking needs, access and security needs, etc., be sure to factor in long term needs. By obtaining facilities and lease terms which will allow the company to expand, downsize or relocate as circumstances dictate, business owners can avoid the unnecessary headaches, loss of business and costs associated with relocating. Examples of such important lease clauses include:
- Expansion rights obligate the Landlord to provide Tenant with more space should it become necessary.
- Cancellation rights (commonly referred to as a “kick-out” clause) allow the Tenant to break the lease under certain conditions such as when the Tenant needs to expand and the Landlord cannot provide additional space in the premises.
- Extension right is similar to an option, and allows the Tenant to remain in the premises (an option to extend is a type of extension right).
- Sublets right give the Tenant flexibility in that if it must relocate, it may sublease the space and mitigate the economic pressure.
Suggestion: After discussing the company’s immediate needs and long terms goals with senior management in all departments, meet with leasing experts and space planners/architects to determine a) the most productive combination of office size and layouts (modular furniture, hoteling, size, amenity requirements, etc.), b) facilities which are flexible enough to service future needs, and c) certain lease clauses which will be negotiated into the lease document.
3rd Most Common Mistake:
Unless someone in the company is already an expert in commercial real estate, most business owners cannot afford the time necessary to learn this complicated industry. Lack of knowledge combined with time pressures can cause unrepresented owners to a) make location decisions without being aware of ALL the choices, and b) make costly errors that cut into their profits and increase their financial exposure leaving valuable dollars on the table during negotiations to renew a lease or relocate to lease, purchase or build.
An experienced and specialized Tenant Rep counterbalances the Landlord’s/Sellers professionals, and will insure that the Tenant receives the best possible rates, terms, incentives and lease clause protections. Incredibly, this valuable service may cost the business owner nothing, since Tenant Reps share in the Leasing fees with the listing agent and are paid by the Landlord or Seller.
Using the Landlord or Seller’s broker may lead to incomplete information, or conflicting loyalties because of hidden agendas or Landlord relationships.
Note: Business owners who do not use a Broker will likely not be aware of all the possible facility choices. This is because an experienced Tenant-Rep broker has developed a databank of every property on the market, an extensive network, and commonly finds facility choices which are not yet vacant or on the market.
Suggestion: Tenants should also keep their broker involved in the expansions, contractions, renewals and extensions that occur during the lease to prevent uninformed decisions that lead to lost opportunities.
4th Most Common Mistake:
LEASE COMMENCEMENT DATE
IS NOT TIED TO BUILDING COMPLETION
This has been a disaster for many inexperienced Tenants who found that unexpected delays in the planning, permitting and construction stages ate into their rent-free build-out period and caused budget nightmares.
Suggestion: Tenants should always propose a clause to the lease which provides for an extension of the lease commencement date if pre-opening delays are encountered which are beyond the control of the Tenant. Your Tenant Rep and a good real estate attorney can suggest some good lease language.
5th Most Common Mistake:
UNDERESTIMATING THE CONDITION
OF THE PREMISES
Tenants who take a property “as-is” put themselves at great risk. Even when the space looks fine and has been previously occupied, building codes may have changed or the unit’s infrastructure may be broken or inadequate.
Suggestion: It is best to have the Landlord guaranty the space is up to current building, fire, safety, zoning and ADA codes. It is also good to have the Landlord guaranty the condition of the electrical, plumbing, heating and air-conditioning systems for the first 90 days (if not the entire term of the lease).
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 professional Tenant Rep, 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 both 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, unrepresented tenants do 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.
Suggestion: Use an experienced “location analyst & incentive negotiator” to make sure you obtain the best incentives possible.