Too often, this is how tenants (and some brokers) handle their real estate.
Fire
Tenants are eager to get the space they think they need, so they start by looking around. Landlords market their buildings well and say what they need to say to get tenants interested. Tenants focus on what they know–like rental rate, lease term and “turnkey” buildouts–while landlords leave the important costs and risks out of sight and out of mind. Tenants, in turn, sign letters of intent based on vague terms, psychologically commit to the space and lose leverage to negotiate anything beyond page 1 of their leases.
The tenant was never ready and didn’t have the expertise to aim, but they fired. And now, they have a lease representing their second largest expense and possibly their biggest liability.
Ready
Following the lease, tenants may have to “negotiate” what is to be included in their buildouts, under what conditions they may perform subsequent alterations or sublet, or how to avoid getting overcharged on operating expenses. Tenants find themselves lacking leverage, because none of the above was properly evaluated or negotiated long before a lease (or renewal amendment) was drafted. The building services may also be deficient, partially because the building was not well-evaluated, but also because the lease didn’t protect the tenant.
Aim
Was the tenant’s space ever properly programmed? Were all operational needs relating to the space and building identified? How well does the overall financial structure of the transaction align with the tenant’s financials and business plan? Were potential business plan changes accounted for in the lease? Does the facility align well with the tenant’s organizational culture? Each of the above questions must be answered to avoid taking on undue risk or overcharge.
Of course, the right approach is:
- Defining the existing lease/expense situation and aligning your real estate plan to meet your strategic, operational, cultural and financial priorities (ready);
- Evaluating the facility, building infrastructure and landlord long before you ever get to a lease (aim);
- Implementing the lease, or renewal, to ensure that it comports with the lease terms you thoroughly negotiated at the proposal stage and effectively managing the design, construction and relocation, whether its performed by you or the landlord (fire).
