When preparing for your lease expiration, think about the amount of time needed for the process. Counting backwards, it usually takes the landlord three months to get the permits and build out the space based on the agreed upon floor plan. Allow one month for the lawyers to negotiate the lease and three to six months to research your options, negotiate the terms of the deal, and design your space. The whole process should take about 8-12 months if you are between 5,000-10,000 square feet and a year or more if you are over 10,000 square feet. If the tenant allows the proper amount of time, the tenant will have negotiating leverage, which I call “positive time”. If too short an amount of time is allowed, the landlord will have leverage, which I call “negative time”. You don’t want to be caught in negative time.
Next, the corporation’s most recent two-year financial statements should be prepared and ready for submission to the landlord. Landlord’s want to know who you are and what you want. Who you are is determined by your financials. If the financials are good to excellent, they should be shown to the landlord in the beginning of the negotiations; they will create leverage. If the financials are poor, they should be shown after the business terms have been negotiated. The landlord will not negotiate the security until he sees the financials. If the financials are weak, he will ask for a larger cash security, letter of credit or personal guarantee.
If the landlord is nervous about the company’s financial ability to fulfill the lease terms they will look for their upfront expenses secured. These expenses include the cost of the work to build out the space, the commission, and the concession. Benchmark numbers for the work letter are $20 per square foot, commission is $1.00 per square foot and the concession is determined by the amount of free rent. The total security can burn off over the term of the lease. For example, a 10-year lease will burn off at a rate of 10% per year. In short, make sure enough time is allowed and the company’s financials are in order to maintain leverage when negotiating.
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Planning Ahead #2: Your Lease is Expiring…How to Prepare!
July 7, 2017
Ross Selinger