Thursday, May 20, 2010

The Easy Way Out Is Also The Expensive Way Out

So, if you recall from last time (if you don't, just scroll down and have a quick read) hastily renewed your lease and you thought to yourself..."Great, one less thing to worry about. Now I can get back to trying to running my business."

Well, here's the thing...For most businesses, real estate costs are second only to salaries as the largest business expense. So a vital part of running your business, is intelligent real estate strategy.

You renewed your lease without changing any of the terms that were unfavorable to you. You accepted a rental rate dictated by the Landlord. You didn't get an allowance to refurbish or freshen up your space. You didn't analyze your space to see if still makes sense for you. You took what you thought was the smart and easy way out. I don't blame you. It's pretty overwhelming to try to figure these things out while you're running your business.

Let's look at the rental rate as an example. Let's say your were paying $25 per square foot when you signed the lease 5 years ago. You had agreed to 3% annual escalations, which at the end of the 5 years became $28.14 per square foot. You just renewed and agreed to continued escalations, which at the beginning of your new lease will have you paying almost $29 per square foot. To put it in perspective, if you were in a 5,000 sf space, that would be $20,000 more per year. You think, OK, everything else has gone up too, right? Wrong.

Rental rates have dropped in the last few years, and even if they hadn't, you're an existing tenant, you should get a better deal than a new tenant. A new tenant coming into your building might be asked to pay $23 per square foot and get a few months of free rent on top of that. Why should you, an existing loyal tenant pay $6 more per square foot than a new tenant. Don't blame the Landlord, this is your fault. You waited until the Landlord knew you had no other options, you didn't enlist the help of an expert, you didn't research the market. In short, you let your guard down. Now, I'm not here to scold you, I just want to give you some better ideas.

First, plan way, way ahead. For space under 3,000 sf, you will need at least 8 months, 3k - 15k - a year, more than 15,000 sf should be looked at around 18 months ahead of time.

Next, hire an experienced tenant representative who can take all of the pressure and time required off of your plate and onto his. Aside from the rent, there are a hundred more things that need to be considered before you sign a lease. A good tenant rep will look at total occupancy costs rather than just the base rent. Make sure that his interests are aligned with yours, not with the Landlord and that his allegiance and fiduciary responsibility is to you. You won't have to pay anything out of pocket for this, his compensation comes from the Landlord.

Some people prefer to represent themselves. Next time, we'll look at reasons for and against hiring an exclusive broker to represent your interests.

In the meantime, you can always find me at or 631-424-4888 ext. 302.

Thanks for your time.


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