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Tenant Advisory
A Primer:
How to Spend
More Money on Rent
Dealing with space related issues is an aggravating, but sporadic, occurrence for most firms. The aggravation and lack of in-house expertise often causes these issues to be given a low priority. Yet, space related costs are one of the largest items on the financial statement. Based on our experience, we've compiled some of the more common mistakes made by tenants. These mistakes often result in higher occupancy costs.
Delaying decision process to relocate or renegotiate
As leases near expiration, the inclination is to extend the lease to avoid potential near term costs and disruption of a move. In any lease renegotiation, many factors serve to tip negotiating leverage to the landlord. Delay is the major factor that works to the landlord’s advantage by reducing alternatives available to the tenant. Establish a timetable, investigate your options, and know your landlord's competitive position.
Not reviewing your existing lease
Leases make for excruciatingly boring reading material. Few tenants do lease audits. At the end of a lease term, some CEO’s have been very surprised to discover that their leases were automatically renewed because of a missed notification date specified in a lease. Or an option has expired. Know the critical dates contained in your lease when an action must be taken. A lease renegotiation is an opportune time to address any potentially onerous lease provisions.
Not evaluating lease alternatives
Before renewing your lease or relocating, space users should explore the full range of options that may be available. Most tenants cannot quantify the monetary benefits that accrue to a landlord from a tenant renewing its lease - even at the same rent. Even if your internal needs remain static, keep in mind that real estate market conditions have changed since you moved into the space.
Saving money by doing everything in-house
Tenants are faced with lease issues and/or relocation infrequently. Tenants must undertake an unfamiliar process within proscribed time frames and deal with a host of vendors and issues: lease documents, space planners, contractors, sub-contractors, change orders, certificates of occupancy, delays in availability of critical materials, telecommunications, networking, movers, etc. One very typical policy – the low bid – may not result in the lowest cost.
Over reliance on space owners or their agents
Landlords and their agents earn their livelihoods negotiating and dealing with real estate and construction matters. Tenants deal with them only occasionally. The landlord-tenant relationship is inherently adversarial. The space owner seeks to maximize rental income and your time commitments; the space user wants to minimize rent and have a flexible lease commitment. Obtain objective and independent expert advice.
Not allowing enough time
Any space commitment requires decisions that reflect strategic goals, future space needs, rental markets, and staffing levels. Accurate information must be gathered, detailed analyses prepared, and alternatives evaluated. The process is time consuming. Decision making processes of both tenant and landlord may be complex and time consuming. Allow a minimum of 6 months for lease renegotiation and 9-12 months for an expansion or relocation.
Not introducing consultants and vendors into process early enough
Tenants are often reluctant to bring architectural or engineering expertise into the scene because they are unable to define the services required. And when an owner offers the "free" services of his architect or engineer, tenants often accept. When a landlord offers "free" services, keep one thing in mind: It's not free. Retain your own consultants - early. It will save you money and time.
Concentrating on rent per square foot
Rent per square foot is often a misleading indicator of occupancy cost. Effective rent, net rent, market rentals and similar quotes do not reflect what it will cost you to occupy a particular building. Owners and agents quote as low a number as possible; users want to know the total cost. Occupancy costs are affected by such items as construction of tenant improvements and how efficiently a space fits a firm's needs. Accurate rental comparisons between buildings are invalid without detailed specifications.
Not identifying critical issues early enough
Each space user has special needs - whether it be a computer room, clean room, extra power needs, training rooms, acoustic and air conditioning requirements, or specialized meeting areas. Not identifying those needs beforehand and ensuring that a particular property can accommodate them can prove costly. One local firm executed a long term lease without getting municipal permits for their specialized usage. They paid rent on their empty building for 2 years.
Believing that a square foot equals 12' by 12"
A square foot is the common unit of measurement in real estate. Like men, all square feet are not created equal. An interior square foot can be rentable, usable, or assignable. Four trade organizations have established four differing definitions of a square foot. In more cases than is realized, the definition of a square foot is what your landlord defines it to be.
Not scrutinizing operating costs
When you receive your annual escalation statement, how do you know it is correct? Owners and lenders reduce their risks by making rent as "net" as possible. Operating expenses are 25 – 35% of your rent. That makes scrutiny of these expenses increasingly important (they should be detailed in your lease document). The only time a tenant can influence what expenses get charged to them is when a lease is negotiated or renegotiated. Know what expenses are justified.
Parker’s Proverb
Planning is like insurance. It is too expensive until you need it and then it is too late.
Golub’s Second Law
A carelessly planned project takes three times longer to complete than expected. A carefully planned project only takes twice as long.