Rent is often your second biggest expense behind labor. And your lease is one of your largest exposures so follow these tips when your lease is up.
Several years ago, my client informed me that he was going to expand from 35,000 to 85,000 square feet and personally guarantee the lease. His business was growing at about 50% per year so his desire to expand was understandable. Since he had 30 foot ceilings in his current space I recommended he use the airspace overhead to install a mezzanine and get more years out of his current space.
I analyzed the letter of intent and asked him if he really wanted the personal liability for this new lease which was about $1 million a year in rent. He decided against the expansion and as it turns out, that was fortuitous as he had some down times in the ensuing years. He stayed in his existing space and his profits since then have reached all-time highs.
I recently sat down with my commercial real estate broker, Walter Robinson, to shed light on negotiating the best deal for space. Here are some of his tips.
Start renewal negotiations with your existing landlord 18 months before the lease expires. This gives you time to study the market and tour comparable spaces, negotiate a lease and do the build out.
During the first six months, you have the most leverage possible for two reasons.
First, your current landlord knows you’ve given yourself enough runway to negotiate a lease with a competitor, get architectural and engineering plans and permits, and complete construction of the build out prior to expiration.
Second, your current lease may require you to give advance notice to exercise renewal rights, termination rights, expansion rights, purchase options. Rights are valuable and unless exercised timely during that 18 month window, you may forfeit them unintentionally.
Finally, you want to avoid a ‘gun to the head’ situation, which occurs when time is too short to negotiate a new deal or move. And you definitely don’t want to pay holdover rent if your new space isn’t ready before your lease expires.
So mark your calendar now to start 18 months before your lease expires. If you liked this, please share it with your friends.