By David Marino

Commercial real estate is a “learning by doing” business. It is one of the only industries where there is no single class to take, no rule book and essentially no regulation that prepares a commercial real estate professional for lease transactions.

Having been in commercial real estate for 35 years, representing tenants across all industries, size ranges and uses, I’ve seen the good, bad and the ugly. While I’ve negotiated thousands of outcomes for my clients and witnessed many thousands more, it’s time to put those lessons forward for business owners and executive teams so they can make better real estate decisions.

Here are the five biggest mistakes I’ve seen people make in commercial leases:

1. Getting The Price Right, But Everything Else Wrong

I have seen far too many business owners brag about their lease rate, only to realize later that they:

• Got talked into taking too much space.
• Were not presented buildings that were better suited.
• Didn’t get an adequate tenant improvement allowance to fund all of the costs.
• Were steered into a listing of the broker representing them.
• Did not negotiate as much free rent as they could have (for example, I have done a few leases during this downturn with a year free on a six-year lease).
• Had the lease commenced before the tenant improvements were finished and did not get proper rights to signage, parking, expansion, termination and/or operating expense protections.

Or, they run into a myriad of other considerations that could have been negotiated.

Leases are complex, multi-variable transactions. Oftentimes, management teams and business owners don’t even know what is possible, particularly in the downward-moving markets we are in today, and landlords and their brokers like to keep things opaque.

2. Signing Leases That Are Too Long

Enticed by increased free rent packages and marginally lower starting rents, companies will often sign leases for years longer than they should. Some tenants double the length of their lease commitment but only improve the transaction by 10% or less.

Consider the office tenants getting crushed on their P&L statements that have another 3 to 4 years left on their pre-Covid 10-year office leases—or the biotech companies burning cash on 10-year leases they signed from 2020-2022 when that cash is needed for survival today. Or consider the start-up companies that sign five-year leases, where that lease becomes a liability as the company needs to grow or exit.

While long-term leases are good for well-capitalized and stable companies in tenant-favorable market cycles like today’s, far too often, tenants get into longer obligations than they should.

3. Not Going To Market At Renewal Time

With proper preparation, many tenants can move over a three-day weekend or a few weeks, yet many companies are renewing their leases in far more space than they need simply because they fear the cost and disruption of moving.

I’ve found that tenants who do not evaluate their moving alternatives or understand their true cost of relocation versus lease renewal generally pay a lease renewal premium of 15% to 25% compared to a new tenant coming into the building off the street. A savvy business owner would not consider anything less than a fully vetted transaction for any other contract they sign, so why act captive at lease renewal?

Worse yet, many tenants are being approached by their landlord well in advance of when a tenant would normally start the relocation process, being baited into engaging in a renewal negotiation with promises of “getting a great deal” while falling for marginal rent reductions and meager concessions.

It’s best to decline these overtures and wait until you can “play the move card” and go to the negotiating table.

4. Thinking Of The Building Owner As Your Friend Or Partner

Way too often, I hear a business owner say something like, “We have a great relationship with our landlord,” as if the landlord is somehow going to cut that tenant a favorable deal.

Landlords are in the business of paying their mortgage and other expenses, giving a return to their partners or investors and making a profit—in that order. While there are surely exceptions, many building owners chummy up to their tenants, hoping that the tenant behaves captive during renewal and doesn’t engage qualified representation that the landlord must pay. It’s the ultimate pro-am competition, where landlords run circles around tenants and have heard every line in the book they helped to write.

Many landlords do a good act of letting you think you’re getting the best of them, as it reinforces the narrative they have helped create. What business reason is there for landlords to have “relationships” with tenants, whereby a landlord is then vulnerable to leaving economics on the table, eroding the landlord’s profit? None, not a one.

5. Thinking The Landlord’s Listing Broker Will Treat You Favorably Or Even Fairly

Building owners often have their listing broker do their bidding—that charming, friendly face you see showing space who always seems to know what’s going on. But you must understand that person is the outsourced sales and marketing arm for the building owner—the landlord’s proxy. What you tell them is not confidential, and the landlord knows exactly what your limitations are, and that you are, or are not, looking at other options—and what those options are.

Sometimes, these “listing teams” split up and have one agent represent the landlord and one represent the tenant, but these listing teams are long-time business partners and share in the commissions generated. They cannot negotiate against each other and, in no reality, could be expected to. It’s a great structure to skirt around the conflict of interest of the same broker representing two parties with opposite financial and strategic objectives.

Taking Back Your Power

While I have dozens more examples, these are the foundational ones for business owners and executive teams to get right if they expect to generate great outcomes on their commercial leases or purchases.

Tenants need to take back their power and recognize that they are the customers in the landlord/tenant relationship. Getting the basics right sets a foundation for cost-effective, operationally, culturally and strategically correct real estate decisions.