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Six Common Mistakes to Avoid When Renewing Your Lease or Negotiating a New One

A lease expiration is one of those down-the-road events that just seem to creep up on you faster than anticipated. All too often, the lease negotiation process does not obtain enough attention until close to the end of the current lease term.

Failing to adequately plan ahead for a lease renewal can end up being very costly over the long run but the good news is that paying attention to just a few key issues can save you big money over the term of the new lease. This is truly one of those situations where doing a little pre-planning and avoiding the most common mistakes can reap huge results.

Here are the six most common lease-renewal and negotiating mistakes that I have seen over my 12 years in exclusively representing companies with real estate needs.

1. Waiting Too Long to Create Your Game-Plan

It is simple but true: you cannot get the desired results unless you have a plan. The key to success in a lease renewal is to drive the process rather than letting the process drive you. Investing even a small amount of effort to create a timeline, define your goals and to consider some alternatives nine to twelve months ahead of the lease expiration can make an enormous difference by putting you in the driver seat.

2. Tipping Your Hand Too Early

Believe it or not, the typical strategy that many tenants start with is to ask their landlord for a proposal to extend the lease for a new term. Landlords love this scenario because it tells them that your preferred path is to stay in the space and everything after that is in the details. It certainly does not hurt to make them worry a bit about losing you. Consider going out to look at some other spaces before any discussions with your current landlord. Most property owners stay on top of the real estate buzz in their region and it never hurts to have them hear it from the market that you are out there looking. Plus, you never know what you might find and maybe some real options that will strengthen your negotiating position.

3. Build-in Exit Strategies in the New Lease

When signing a new lease, most companies are focused on how the space is going to serve their needs over the lease term and they spend little or no time considering the possibility that they might need to make an exit before the lease term is complete. The economic downturn over the past few years has certainly demonstrated the need to always have a back up plan. With commercial leases, the most common exit strategy is to sublease the space to someone else but it can be hard to find a sublease tenant whose needs are a perfect fit for your space. So plan ahead. Think about how you might go about sub-dividing the space to market it better. Also think about tenant-improvement costs of reconfiguring the space for subleasing. It may never happen but, if it does, a little forethought can make your exit strategy more of a reality than just a hope.

4. Do Not Underestimate Your Tenant Improvement Costs

All too often, early ballpark estimates of the TI costs turn out to be significantly lower than the real costs that emerge after architectural drawings and construction bids have been developed in detail. If those early estimates get locked into the term sheet and lease agreement, then the tenant is stuck paying all of the overages. It can be a good idea to bid out the scope of work before locking a TI figure into the term sheet and to use your leverage before signing to establish a not-to-exceed TI cost that is as realistic as possible.

5. Getting Obsessed with Fighting About the Small Stuff

In any negotiation there is an ongoing process of give and take. In order to get the best deal, you need to decide ahead of time which issues you can give on and where you need to hold firm. Knowing the difference between your critical and non-core factors and understanding the tradeoffs puts you in a much stronger position than if you just fight with the same intensity across the board. It is also a good practice to identify the real economic issues and to quantify their relative impacts so you know which ones are most important to your bottom line. You may even want to throw in some red herrings in at the beginning of the process so that you have something to give away later on.

6. Audit the HVAC Systems

One of the biggest potential cost factors that can pop up unexpectedly during the term of a triple-net (NNN) lease is the need for expensive repairs to the HVAC systems. In triple-net leases, the tenant is solely responsible for such repairs so investing in an HVAC system audit before signing is cheap insurance against the risk. If any issues come up, require the landlord to perform the appropriate services or repairs before signing the lease. In today’s market, strong tenants could even demand that the landlord include a warranty against some HVAC failures.

The bottom line – whenever you are renewing a lease or negotiating a new one – is to plan ahead, to be aware of your options, to understand the tradeoffs and to minimize your risks. A good starting point is to keep the above six key issues in mind and to avoid making these common mistakes so that you can focus on staying ahead of the game.

Scot Ginsburg is an executive vice president of Hughes Marino, a global corporate real estate advisory firm that exclusively represents tenants and buyers. Contact Scot at 1-844-662-6635 or scot.ginsburg@hughesmarino.com to learn more.

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