Check out the newest interview with the Profitability Paradigm and learn the pitfalls of signing a commercial lease and how to avoid them in order to save time, money and energy.
Following is a transcription of episode 11 the LeaseSmart Commercial Real Estate Podcast.
Bradley: Hey, I’m Bradley with Business Advisors. We’re here with LeaseSmart where they focus on improving your profits thru the best site and the best terms. We have founder Craig Melby here. Craig, I know you’re in the battle every day helping people with their commercial leases. In the last few days, has something come up that makes sense for us to talk about so everyone else doesn’t fall into the same trap?
Craig: Oh! Absolutely. There’s dozens of them but one continues to pop up. It occurs to me, there are clauses that no landlord lease has in it that need to be added, and this one that I wanted to speak about today. It is what we call in the business a “Kick-Out Clause” or more technically speaking, a “Lease- Termination Clause”. For obvious reasons, landlords don’t put these in their leases as standard practice. But for expanding companies, or in today’s modern world where companies fail fast or expand fast or need flexibility, we need to put that in there.
Basically, we’d like to have a clause added that says that if your business does so well that you need to expand, you can, under certain circumstances cancel the lease. Just going back a second, most landlords want a 3 to 5 year lease minimum, and many are even wanting a 10 year lease term. How many businesses do you know that know exactly what they’re going be doing in 3 or 5 or 10 years? They may need to shrink or expand or do something differently. So this clause gives them the flexibility they need. Oddly enough, sometimes we add that clause into leases even when we think it is not really that important. We think we’re pretty stable. We won’t need it, but we ask for it anyway and get it. Then it’s surprising how many times a tenant will go back and think Holy mackerel! I am glad that’s in there because things did change. Now, we can get out of this lease without suffering major damage. Now, to make this fair for the landlord, we don’t mean that the tenant can cancel the lease at any time for no reason and at no cost. What we mean is, in a given time frame, like say you have a 5 year lease, after the first 2 or 3 years tenant can give the landlord 6 months notice and pay unamortized tenant improvement dollars or unamortized leasing fees or whatever damage the landlord’s going to suffer, you need to reimburse him or her for that. It can get pretty sophisticated. We can tie it to specific events like not meeting sales figures or overall economy. Whatever. We don’t want the landlord to think this is taken lightly or willy-nilly but we do want to structure it so the tenant has the flexibility to do what he or she needs to with the business.
B: You know it’s fascinating because we’re actually going thru something very similar. I’m managing an office in San Jose. I’m management staff. In San Jose, we just had our monthly staff meeting yesterday. We’ve been adding enough employees that now we’re out of chairs in the conference room for all our meetings. In the next couple or 3 months, we’re going to find ourselves chock full. We’re going to have every space occupied and then in about another year, I’m going to be looking for a supplemental annex space where we could put more teams because we just plain don’t have the room but the reality is we just signed the lease 9 months ago so we can’t get out of the lease. So this is really interesting from a business owner’s stand point and a leader’s stand point to be able to keep the team together. It really impacts profitability. You have to deal with the communication back and forth. That’s just so many things. That’s amazing.
C: Yes it is. And it makes sense, but people don’t think of it. The way I would handle that, your situation, would have been to go to the landlord and say “Look, we may need to expand quickly and if we do you either allow us to expand in your building (if it’s a big enough building), and you have other spaces, then we’ll continue or maybe extend the lease. But we’re going to move up to bigger space and if you don’t have bigger space, then we got to leave and go someplace else. Then we have some other set of circumstances, penalties or whatever but either way you need to be able to thrive and allow your business to grow. I look at it another way too. I wonder what kind of drag on the economy this is for companies that could be opening up space and hiring employees and operating a business but they can’t make that commitment because they don’t know how fast they’ll grow. Without building in flexibility, they’re holding off doing anything, maybe for a long time. So I just think it’s better to get started, build in the flexibility, and move forward with life.
B: Yeah that’s great. So, there are people who want to get you plugged in to their space negotiation, how do they do that?
C: The earlier the better. Landlords love to hear from us when we’re the one bringing the tenant to the table. When you start to look at space or when you’re just in your business planning really. Oddly enough, you see all these business planning services and financing and this and that, and the one thing they don’t cover is site selection or lease negotiation, which could slit your throat if you don’t do it right. So that is just a pet peeve of mine. I guess I should get off that bandwagon. Anyway, just give me a call, 800-962-2419 or find us at LeaseSmart.com. We’re happy to help.
B: Sounds good. We’ll go ahead and wrap this one up as we figure out what’s happening in the commercial lease space. I’m fascinated everytime I get to ask questions, I learn something brand new every time. Thanks a lot.
C: Great talking to you. Bye.
“Following is a transcription of an episode of Corporate Real Estate Podcast.”
Craig: Today, I want to mention something that hit me in an odd way. It is probably a common issue and that is, I overheard a conversation of someone saying “Oh yeah, those lazy brokers! You know, they don’t do that much, these lazy Commercial Brokers.” I realized I know lots of commercial brokers and NONE of them are lazy. They all work their tail off, so how can a client think a broker is lazy? And then it occurred to me why: It all has to do with loyalty, responsibility and obligation.
If you are a buyer or a tenant and you say “Okay, all you brokers find me something because I need some space.” Let’s say three (3) brokers go out there and they all find the same space. Now which one are you going to use? Who are you going to do this deal with? It is not like you would go to a few attorneys and say “You all draw me up a will and I’m going to pick the one I like best and then too bad for the rest of you.”. A busy professional person including a Real Estate Broker cannot and will not do a lot of work unless you’re being loyal to them. So, I realized then that business owners do not recognize that they need to go with someone exclusively. If it doesn’t work out, then cancel the agreement and go with someone else. But if you get five (5) brokers, each doing almost nothing because they’re not your exclusive broker, that’s a whole lot worse than going with one person who’s working really hard for you. Here is a perfect example: When I have a client who says “I need a space in the city and here is what I need and I am relying on you to find it for me.” Well, I tell you, I work my tail off for this client. I go through all the data bases to identify what is there. I contact all the brokers and see what else they have that might be off market or coming to the market. I send out mass emails to my networks saying “Hey! Here’s what I’m looking for. What do you have?”. I drive the streets looking for space. It is a lot of work, none of which I’ll do if you say “Oh, well if you find something let me know.” That’s about as good as nothing. I don’t have the time for that and I think it’s true for everybody.
My final advice for today is; If you’re thinking that a broker is lazy, chances are, it’s your relationship with that broker that needs to be changed.
“Following is a transcription of an episode of Corporate Real Estate Podcast.”
This is going to be a favorite. I can tell it already because a lot of people google the term “negotiating a commercial lease” or they talk about it all the time: What do I do? How do I do it? Etcetera. So, I do this all day every day and I have some very good tips on how to negotiate a Real Estate Lease or Purchase or anything really. It’s all the same.
Tactic # 1: KEEP IT TO YOURSELF! – Quick story about one of my clients. I always remind clients – and they get insulted that maybe I have to remind them of something so simple – but I’ve learned from experience I need to. So I’m about to show him a really nice space. Just perfect for him. Perfect rate, perfect size, perfect location and there’s not a lot of other places to choose from. So while we’re waiting for the listing agent to show up, we’re in the lobby at this nice office building and I say “Now remember, if you love the space, don’t go crazy about it and don’t tell the landlord’s agent. You just let me know and let me take it from there.” He says, “Oh yeah sure of course, of course.” So we get up there, we’re touring the space. The client is crazy happy about the space. He starts commenting out loud: “Oh! It’s perfect. Oh look at this! We can do this and that and that and this and size and blah blah blah. This is perfect! Oh and look at that view, yes I love this!” So he turns to the landlord’s agent and says “What’s the rent here?” Agent says, “XYZ”. Client says, “Oh that’s great! That’s a great deal. Yes I love this space. This is wonderful!”
Craig: I know. So inside I’m thinking “Oh my God!”. That just cost him a bunch of money. Now how am I supposed to go back to the landlord agent and negotiate a better deal? You know: Maybe some free rent. Maybe some interior improvements. Maybe a lower rate. Who knows what. He just told the agent he loves the space. So that cost him a bunch of money.
N: So you recommend that they learn poker. That they should be experts in poker? At least enough to play it cool.
C: Exactly! I’m not recommending dishonesty or anything. The point is we’re always looking at multiple choices. You know, even if one of them, you love way more than the others, still we’re technically looking at more than one. So we need to be calm and say “Okay Mr. Broker, we do like the space. It could work for us. We’re looking at a few different things and we’ll get back to you.”. So that’s the first thing, “We’ll get back to you.” Which we do.
Tactic #2: “YES, IF” – So now, when we get back to the Landlord, the next thing I say is “Alright. You’re space could be our number 1 choice if we get the following terms, blah blah blah. We’re not going to be making offers on a lot of different properties. Yours could be our favorite under these terms. Can you do these terms?” That’s the way to keep the landlord’s broker rightfully motivated, and be real sincere about hammering out a deal.
N: Yeah I like that. It’s like you said, it is honest. You’re letting them know that you prefer them. Then you’re also telling them exactly what they would need to do to make it work for you and to make it profitable for your client.
C: Right! If it won’t work then we will go on. We might love this space and be heartbroken that we can’t take it but nevertheless, we can’t and won’t if the terms aren’t right and there could be a lot of detailed terms in there. But usually things go pretty well from that point.
Finally, Negotiation tactic #3: LOW-BALL OFFERS IN A NICE WAY – Sometimes you just don’t want to pay what the landlord is asking. Sometimes the landlords are crazy with what they’re asking. Sometimes they’re fair enough but we just can’t pay that. So the way I address that is like “Look, we know your space could be worth every bit that you’re asking. This is not an insult, but our business model can only afford X dollars so here’s what we could pay you for that space. Then they don’t have to get insulted about it. You know, it’s like if I have a car for sale that’s 50 thousand and you say you’ll pay 20, now I’m insulted. Get away. I don’t even want to do business with you. But we’re saying “Hey! It could be worth 50 thousand but my budget is 20. If you’re willing to sell it for the 20 I’d be happy to buy it. So it’s the same thing with this. These are terms that work for our business model. If you can’t do it we understand we’ll move on the next one. Then there’s no feelings get hurt.
N: Yeah! I like that. It’s very professional.
C: Yeah and people don’t recognize some of these very simple items but you nail these 3 and you’re far along the path to getting the job done right.
N: Do you accompany your friends when they’re trying to go buy cars or trying to buy appliances because you’re a good guy to have around.
C: (Laughs) You know it’s funny and that brings up another issue I’d like to mention. People don’t negotiate for themselves very well. I am a terrible negotiator for myself! If I have the car for sale, you would want to buy from me because I feel like a cheapskate if you offer me less and I don’t take it. I want more but it’s like “Yeah I can afford the difference.” So I sell stuff cheap all the time of my own. But for other people, it’s my professional obligation to get the best deal, and my personal ego doesn’t get involved. I think that’s the way it is with human nature. You probably should let other people negotiate for you.
So there ya have it! Some more good Commercial Real Estate Lease Advice.
“Following is a transcription of an episode of Corporate Real Estate Podcast.”
This issue is actually a kind of personal pet peeve of mine. I certainly consider it a lease landmine when the language is buried in the boiler plate and many times even the landlord doesn’t understand the full implications, and in our negotiations we get this changed all the time. If disaster never strikes it won’t matter, but if it does, this could literally save your company.
What I’m talking about is Rebuild Time. If you’re in an office building or shopping center or whatever, what happens if there’s a fire in the building or a hurricane or an earthquake or something that damages your space? Do you know how much time the landlord has to rebuild your space before he can make you come back and occupy that space again? Sometimes the time is unlimited! And remember, you’re not occupying your space at this point. How do you perform your business functions? Imagine this: Tomorrow morning you can’t go to work. Your space has been ruined by fire. You can’t go lease some other space because when the landlord rebuilds this one, you have to comeback. I don’t even know where to go from that. You know, you got clients you must keep happy or they will go elsewhere and I think the statistics are pretty serious about if you don’t service your client for 6 months or so they’re gone and your business is toast.
Natalie: Yeah, they’re not going to hang around.
C: No! Of course not. They have their own lives to lead. So you need to be in business tomorrow, not hanging around waiting for the landlord to rebuild the space. Of course, the landlord may need to get permits, he may need to get prices. He needs the insurance company to come in and do a claim. This takes months! In the fastest possible time frame, it takes months. So you just have to deal with it and in a way that works for you. Landlords might typically say “Well if takes more than such and such time to rebuild the space, we can cancel the lease.”. Yeah fine but the tenant needs the same opportunity to cancel the lease. So you need to be reasonable and maybe within 30 days the landlord has to tell you how long it’s going to take to rebuild the space and if takes longer than X days, you agree that you can cancel the lease. Or you work other terms out allowing you to rent temporary space, and you don’t have to come back within a certain time because now you have this new lease obligation to fulfill.
I consider this a serious land mine that is in almost every lease which is not negotiated properly to the tenant’s benefit, and all business owners need to look at that very carefully and deal with it.
N: Yeah, I’m sure some of our listeners are thinking, “Well, fire, that’s probably not going to happen, that’s a very rare event.” But from personal experience in Property Management I see that somewhere, every year, it happens.
C: Yes, absolutely. It has happened to a client of mine in fact. When we negotiated the lease we never dreamed we’d actually need this clause, but when the doctor’s medical office did burn two years later, I look like a hero when he went to his lease and saw the right provisions and was able to call the Landlord and say, “Hey, Mr. Landlord, sorry, but I’m out of here.” Boom! Gone. We’re moving elsewhere. He was able to keep his business going without all the fuss and muss that he would otherwise have to go through. So yes, it does happen. It’s a no-cost item to make that change in your lease. Everyone should do it.
N: Well, thanks again for this great lease negotiation advice!