Intro

The best thing a company can be doing at this point within their lease is: review the lease, prepare a preliminary space plan, update market expectations and prepare a real estate plan as a working document for management and brokerage team success. Below is an introduction to each process. We value your existing internal resources and look to support them and provide Lee & Associates resources, and third party vendors when necessary, to provide a comprehensive unified front to the lease negotiation.

 

Lease Review

The first step in the process is reviewing the current lease agreement. Obvious pertinent lease language are the rent schedule, operating expenses and lease option section. Lesser recognized but no less important lease related sections to examine are historical operating expense reconciliations, tenant improvement allowances, property tax appeals, and lease audit timeframes and mechanics. Additionally, lease option language related to time frames, floors, economics, baseball arbitration, etc. We look for current obligations, contract flexibility, historical and economic inaccuracies and unaccounted for account credits. We create a comprehensive lease review document that provides valuable input when formulating our initial approach with the landlord.

 

Space Planning

The second step in the process is identifying your future space needs. Your impending lease expiration is causing internal discussion about your current and future use of your space. This is normal and to be expected, however this discussion is amplified due to the capital-intensive tenant improvements and equipment involved in business. Most companies have a fragmented process of defining their current and future space needs whereby no one designated person truly takes ownership of the process in a manner that ensures managements decisions are made with operational clarity. Our in-house project manager is available to provide this service included within our fee. The results is an independent unbiased space requirement report.

 

Space Utilization

Excess space concerns are real and there are several ways of dealing with them. On one hand, most companies try to recoup the space expense by subletting out said space if it can be done in a manner that is secure for both parties. If sublease is not practical, we often strategize for how to make the best use of excess space. It can lay dormant, or such excess space can be converted in a low-cost asset by being converted into an employee amenity. Companies can consider giving back a portion of their space to the landlord if it can be marketed to a new prospective tenant. We aid in walking through this process so that you can understand your options and think through the landlord’s considerations before approaching the negotiating table.

 

Relocation Expenses

Knowing your relocation cost is an integral component of the renew or relocate process even if you do not plan on moving. Relocation expenses range from $10,000 for the small office to $6,000,000 for a relocating a 60,000 SF manufacturing facility. We can provide relocation expense budgets as needed to best make management decisions and to understand the value of renewing versus relocating. Additionally, we can help finance understand the amortization of relocation expenses and the payoff period. Most payoff periods in property transactions range from 3.5-6 years.

 

Landlord Interactions

Lease negotiations of this magnitude are akin to a chess match whereby you begin at a disadvantage. Your landlord might be looking at your impending lease expiration as a revenue generating opportunity based on the current market cycle and the perception that moving is cost prohibitive. The best thing you can do is add a seasoned broker to your team to signal to the landlord that you are represented. You can expect your broker to provide:

• Opinion on current lease agreement, review of option language, strategy for approach to landlord
• Fair market rent negotiation
• Project timeline from inception to completion with project management support
• Comparable properties to competitively negotiate as an alternative, whether moving is a real option or not.
• Market information including adjacent leases recently negotiated in adjacent
• properties
• Your landlord’s current indebtedness and maturity date to provide insight into its
• motivations and hot buttons
• Landlord tenant improvement contribution expectations

 

Fair Market Value

Few people can adequately value R&D properties because they have characteristics of both industrial and office properties. The level of office improvement, the additional HVAC, electrical and mechanical improvements, the nature of the roll up and loading doors and the amount of parking is the first pass at comparing properties to effectively negotiation fair market value. In addition to that, R&D buildings only represent a minute amount of market inventory and transact even less. This environment leads to sparse data, drawing inadequate value comparisons and muddy negotiations. If all parties cannot agree on fair market value negotiations, the result is baseball arbitration. Each side hires an appraiser, those two appraisers hire a third appraiser, and that third appraiser assesses the value. The final lease rate is not the value that this third appraiser selects, rather it is used in a manner like prevailing party, whereby the landlord or tenant’s opinion of fair market value that is closest to the appraiser’s assessment is the one that is selected. Rarely is this a productive use of company resources or an avenue that provides a high probability of success. Hiring a good broker prevents this chain of events from ever happening.

 

Money Back Guarantee

It is typical for brokerage fees to be paid by the landlord who owns the property that is being contracted. The reason for this is that the landlord is compensating the broker for the income that is being generated as a return on the capital invested into the property. This is customary, included within the landlord’s proforma and a below the line expense. If the landlord refuses to pay for the brokerage fee than it is paid for by the client. We provide a few different fee options to align our interests with our clients. Additionally, we offer a money back guarantee – If you are not satisfied with our services, you can request a refund of our fee for any reason.

Contact me to discuss your situation in more detail, 949-790-3151, jbsmith@lee-associates.com.