Your landlord just left you a message—your lease is up soon.
It’s the last thing on your mind. You don’t know what your business is going to look like over the next couple of years and the last thing you want to deal with is an office/facility move.
The good news is that the landlord says he’s going to give you a “great deal,” so you ask him to send over the terms. He sends a proposal with a lower rental rate than what you’re currently paying, and you feel good about it.
That’s where your trouble begins.
What most tenants don’t realize is that a mere 20% swing in the rental rate is not the biggest determinate of the actual costs you will incur under your lease; in fact, in many cases, it’s not even in the top ten.
Here are just a few things the landlord may not be telling you.
- He can do better. Most landlords (and lenders) assume they can keep a tenant at more expensive terms than they can acquire a new one (particularly in this market). However, you should be getting the better deal. Your buildout (if any) is less, you have a proven track record of paying your rent (really important these days) and you’ve abided by the terms of the lease.
- Is the space even measured correctly? BOMA, WDCAR or any standard at all? Afterall, your base monthly rent is Rental Rate X Square Feet.
- Are you getting a new base year on your operating expenses and real estate taxes? These are the hidden costs of a renewal. Also, if you’re in the Dulles Corridor, will you be paying the additional taxes associated with the Metro? Why should you if you’re signing a short-term lease today—you won’t be around to use it.
- Is the landlord in (or close to) default with his lender? As I wrote in a prior article (“Are you protected from your landlord’s default?”), the value of your building may have gone down; is the landlord above his Loan to Value threshold? What’s the landlord’s debt coverage ratio, and will the building’s rent roll support it? Unlike owning a house, it’s not enough for a landlord to simply make their payments to the lender on time; they must show that the investment is performing or they risk losing it, and you can, in turn, risk losing your right to lease and occupy the space without a firm SNDA provision.
- What renewal/expansion/contraction options will you have during and after your renewal term?
- Parking can be free, both now and during your renewal. Areas like Tysons Corner fluctuate between free and paid parking depending on the market. Parking costs can add another $2 per square foot per year (double that downtown), unless you pass that burden onto the employees.
- What’s the remedy if the landlord defaults on his management, buildout and transaction cost obligations?
- What audit rights do you have to protect against being overcharged on operating expenses?
- Are your rights to make alterations and remove trade fixtures and equipment protected, or does he or the lender have a lien on them?
- Is the landlord contesting his real estate taxes? He should be (it may not be worth what it’s assessed anymore), but he may not care, particularly is the building is fully leased.
- If you are getting a buildout or space renovation, how secure is the landlord’s ability to fund it, and what’s the remedy if he doesn’t?
Any of these deficiencies in the lease you’re about to renew can cost you substantially more than the little base rental rate “discount.”
When you get the call (or, better yet, before you get the call), call me and send me your lease (if I don’t have it already) to review. Even if you have no intention of moving, the landlord can’t view you as a captive tenant, if you are to not only secure the best economic terms possible, but also maximize your protection under the lease. With me involved, the landlord will take seriously the possibility that you will vacate their building. Yes, distance makes the heart grow fonder.
If you have a renewal coming up in the next several months to a year or are about to experience any type of change in your business that may impact your facility needs, get in touch with me soon. For those of you that haven’t worked with me before, my job is to understand your needs and implement the best real estate solution to match those needs; the landlord’s job is to protect his portfolio. Landlords may have gotten away with adhering to certain “form lease” provisions in the past, but in today’s market, we have the leverage in most cases to better protect your company in addition to reducing your facility costs.
