5. Always use Protection
3. Be the Driver
2. Strength in Numbers
1. Knowledge is Wealth
There are a myriad of components to consider before entering into a new lease or renewing an existing lease. If mishandled, like a bad tattoo, you may look back at your lease with regret when its already too late. Here are five imperative items in no particular order:
Knowledge is Wealth– This has nothing to do with the business terms or financial obligations of the lease and purely the dynamics of a specific submarket (specialized subdivision of a market). Understand the submarket in and out. Understand what competitors are in close proximity to you and how this will influence your sales– or even how this will affect or limit what brands you can sell.
Understand the tenant mix within walking distance or even within the same center– do they attract your targeted customers? Understanding the trends, traffic patterns & flow, and of ingress/egress for customers, will factor into your businesses success. Understand the demographics in the area. Specifically focus on a one and three mile radius. Understand parking limitations and how will this detour potential clients from visiting your site (gyms, grocery stores, etc eat up parking).
No matter how good the concept or how strong the reputation of an existing business, knowing the elements of a submarket, and specific location, can make or break your business.
Strength in numbers –You may want the location, but trust me, if you have a successful business, the landlord will want you as a tenant equally as bad.
An empty building is only worth the bricks and mortar (if that). The true value is in the economics and terms of the lease(s). It’s always best to negotiate on a space using at minimum, two separate properties, owned by two different property owners. This way it’s possible to establish benchmarks and gain the valuable understanding of what the market is offering.
Be the Driver, not the passenger – Never let the real estate drive your business– always let your business drive the real estate you choose. This philosophy is simple: don’t settle because you feel nothing else is out there and don’t feel pressured to take a larger space than you need with the pipe dream that, “We will grow into it.”
Don’t agree to unfavorable lease terms because you are 100 percent committed to one and only one space– like a rabbit in a Magician’s hat, your leverage is gone. Also, don’t let the emotions of real estate or ties to one property or location cloud your judgment and overrule your original budget constraints. Ultimately, the financial strain that the extra and unused square footage can sink your business. Each piece of the total square footage should be a supporting element to improving your business and generating sales or income– unused space can be the anchor that sinks your business.
Understanding your business, the realistic growth patterns, and the specific value add uses of every square inch in the space, allows for efficient operations, control of expenses, and will help lead to longevity and financial strength. There are other business terms in a lease that can account for your growth in the future versus initially signing for too large of a space. In the first year, it is imperative that money is reinvested into the company rather than wasted on excess square footage.
The essential ingredients of life is Timing – It is in our nature to procrastinate, delay, and put off. Specifically on renewals, tenant’s make the detrimental mistake of being reactive and not pro-active in lease negotiations. They wait for the property owner to contact them first. Trust me, the landlord will wait as long as possible, because the less time you have to properly evaluate the market, perform due diligence, evaluate alternative properties, and realistically weight you’re the options, the more advantageous it becomes for the landlord, and they know moving is not an option– your threat of moving becomes nothing more than a bluff.
Timing directly correlates with negotiation leverage. We recommend our clients begin the process at minimum one year out from lease expiration.
Always use Protection – It takes years and numerous completed transactions to have your finger on the pulse of the real estate market and a vast knowledge of the concessions, legal jargon, and business terms associated with a lease. Landlords almost always hire real estate brokers to represent their interest so you should protect yourself and interest by hiring a tenant rep advocate to protect yours.
It is the landlord’s objective to increase the value of their asset by negotiating the highest rent possible, while giving up the least amount of dollars (free rent, tenant improvement dollars, escalations, etc). A third party tenant advocate allows a real estate professional to negotiate tirelessly on your behalf, keeping you, the client, at arms length and ensuring your relationship with the landlord does not deteriorate.
Landlord’s take you to lunch, give you tickets to shows, or send chocolates, because they want to both have a solid relationship with you and gain your trust. Do not forget how landlord brokers make their money: representing their clients and the landlords– not you, the one time deal.