Lease Renewals

Almost every business, when they first sign a lease, negotiate an option to renew the lease. Typically, the only thing that changes with an option to renewal is the amount to be paid in rent. And if you don't do your homework, you'll end up paying more than you need too.

But, if a company does its homework early enough (a company can hire a broker to do the homework for them, as they should and early enough is 2 years before the lease ends), then the savings can be remarkable. Homework entails developing options, which means going out into the market place to look at your current landlord's competition. In your market, a lot could have changed in the past several years.

A company should absolutely hire a commercial real estate agent. They are more likely to know the real estate market. They should know what the lease rates are at the the building your in, as well as what the lease rates are at the building up the street, down the street, and especially that new building that was just completed just two months ago that is now desperate to get some brand new tenants.

And why should you begin to look at options two years out? Well, it's because commercial real estate is relatively slow moving, and more importantly, you don't want find yourself panicking because you've trapped yourself into a time crunch. Generally, to excise your option to renew, you have to let the landlord know 6 to 9 months in advance. That means, you have to know what your options are that far in advance while also leaving some breathing room to negotiate with your current landlord. And to know your options, you have to leave enough time to tour a couple of competing buildings, negotiate LOIs to find out how good of a deal you can get compared to their asking lease rate, and maybe engage in some space planning as well.

But once you know your options, once you've become educated on the real estate market, you are then in a significantly better position to begin negotiating your lease renewal.

Instead of finding yourself agreeing to renew at whatever rate the landlord asks, which is often higher than what a brand new tenant would pay, you can instead negotiate. Being able to say, "We've looked at a number of alternative locations, all of which are less than the rate you've just proposed. Attached is the LOI we've negotiated with that building down the street. A year ago, they remodeled their lobby and now offer a shuttle service to all of those new and exciting restaurants. But, if you match their rate, we will stay," will result in a completely different conversation. By doing your homework, you regain your negotiating leverage.

I hope the discussion above has made it clear why it is worth your wild to have a professional advocate on your behalf. As both a commercial real estate attorney and commercial real estate agent, I can make sure your interests are protected.

If you have any questions or comments, send me an email to bendalton@rebcl.com. Also, if you know anyone looking to buy, sell or lease space in Dallas or the surrounding areas, I do appreciate referrals.

Landlords, Transactional Costs Can Destroy Your Bottom Line

I am representing a client who wants to sign a five year lease in a retail center. The total economic value of the lease, including base rent, triple nets, and tenant improvement allowance is around $150,000.

We spent a good month negotiating the LOI. We agree to terms, and of course, the landlord's attorney sends over a 60 page monstrosity of a lease. This takes 6 weeks of back and forth to get this lease to an acceptable level of balance between the landlord and tenant for me to even tell my client the lease is now sign-able. I know how much I am charging and don't know how much the landlord's counsel is charging, but, let's assume that between the two attorneys, a modest $6,000 in legal fees have been spent to negotiate the deal. The transactional costs for legal fees is at a minimum, 4%.

Perhaps, if the lease was reasonable to begin with, the tenant would have been more willing to spend little more on rent and the Landlord wouldn't have had to pay as much in legal fees. I'm sure the Landlord would love to have someone sign the lease as is, because what landlord wouldn't, but that hope costs money. My practice tip for Landlords, have two leases, one that will quickly get the deal done if the other side is represented by legal counsel and the other, the long legal monstrosity of a lease, that dramatically favors the landlord.

It took 2 and a half months to negotiate this deal. This represents an opportunity cost in terms of only lost rents and triple nets of almost $7,500 or about 4% of total economic value of the deal.

In total, between legal fees and opportunity costs, the transactional cost to negotiate is at least 8% of the economic value of the contemplated lease. That's $12,000.

Yes, it would be impossible to get these costs down to zero, but imagine if you could cut them to just 3%. That's well within the realm of possibility. It would juice your returns by an extra 5% or about 1% a year.

Being able to net an extra 1% in nets on a 20 million dollar shopping center would add, assuming a cap rate of 8%, $175,000 to the value of your shopping center, your office building, or whatever kind of commercial real estate you have.  At a 7% and a 6% cap rate, that would add, respectively, $200,000 and $233,333. This is not chump change.

Remember Landlords, time costs money and attorney's cost money. Quickly negotiating LOIs, having a "fair and balanced" lease, and getting the tenant into the space faster will only help your bottom line.

I hope the discussion above has made it clear why it is worth your wild to have a professional advocate on your behalf. As both a commercial real estate attorney and real estate sales agent, I can make sure your interests are protected on both the economic and legal sides of a deal.

If you have any questions or comments, send me an email to bendalton@rebcl.com. Also, if you know anyone looking to buy, sell or lease space in Dallas or the surrounding areas, I do appreciate referrals.

Remember, Time Costs Money

Using a simple lease will probably increase the net worth of both landlord and tenant by saving time with lease negotiations. This can easily be demonstrated with two scenarios:

Scenario 1: The tenant and the landlord have finally agreed to essential business terms through a month long back and forth negotiation. So, the terms of the final LOI are incorporated into the actual lease by the Landlord, which is 50 pages long of dense legalese, and another 40 pages of exhibits. The tenant's attorney marks up this extremely pro-landlord lease and sends it back to the landlord's attorney. Only a couple of changes are accepted in this go around. The attorneys keep negotiating, while undoubtedly telling their clients that the other side isbeing completely unreasonable and that that the lease, as the other side wants, gives their own side to much liability. All of this back and forth takes an additional 8 weeks until the final lease is signed, if at all. It took three entire months to negotiate the final LOI and lease, with thousands of dollars being paid to the attorneys.

While these negotiations are going on, the landlord suffers the opportunity cost of lost rent, and the real costs of not having their triple net expenses covered. As for the tenant, they are delayed in opening their business. Maybe so much time has passed, the tenant decides to just wait 9 more months because they have already missed the big holiday shopping season, in which case, that's zero rental income to the landlord. But if the lease is signed, the tenant and landlord may very well start off a five year lease with a poor working relationship. Dreadful.

Scenario 2: The tenant and the landlord have finally agreed to essential business terms through a month long back and forth negotiation. The landlord incorporates the final LOI into a straight forward 15 page lease written in plain, easy to understand language. The lease, while favorable to the landlord, already includes reasonable changes that every tenant would ask for, such as caps on common area maintenance, a mutual indemnity provision, and the like. The tenant's attorney only makes a few minor changes that the landlord promptly agrees too. This back and forth takes a single week. The landlord gets a signed lease (and rent money!) 2 months sooner and the tenant gets to open for business sooner well before the holiday shopping season kicks off. And both the landlord and tenant are happier as well, since they didn't have to spend an additional 2 months arguing over dry, boring contract provisions, constantly requesting updates, and to clarify items of negotiation. Remarkable.

So remember, time is money. Time spent negotiating details, especially when those details are unreasonable, cost real money and have real opportunity costs. Whether it is lost rent, lost opportunity or more attorney or marketing costs, time is money. Don't let the details in a deal kill a profitable deal from going forward.

Make sure to check back later. Coming soon, I will have a post on how details matter.

I hope the discussion above has made it clear why it is worth your wild to have a professional advocate on your behalf. As both a commercial real estate agent and attorney, I can make sure your interests are protected.

If you have any questions or comments, send me an email to bendalton@rebcl.com. Also, if you know anyone looking to buy, sell or lease space in Dallas or the surrounding areas, I do appreciate referrals.