Andrew B. Zezas, SIOR
Relationship Manager,
Strategist, President
(908) 245-5999 x11
andrew.zezas@realstrat.com

So, your company's headquarters lease doesn't expire for eighteen months, and you figure you've got plenty of time, huh? And why not, eighteen months is along time....isn't it? Hey, all you'll need to do is have some broker show you some buildings, then you'll negotiate the terms, sign a lease, and if you elect to move, you can do that over a weekend...right? And, your management team won't lose any time that weekend, because your staff will shut down Friday after the work day is over and have everything up and running by Sunday night...right? So, have you always been delusional or is this just a dream?

YOUR LEASE EXPIRATION DATE IS MEANINGLESS

The date your company's lease expires is probably the least important date in the whole of your company's lease document. Other dates contained in your lease agreement are considerabley more critical, especially the date by when you must notify your landlord if your company intends to renew its lease. And guess what? Your company may be required to give its landlord notice anywhere from three to eighteen months prior to the lease expiration date.! Your company MUST decide which direction it plans to take...renewal or relocation…prior to its renewal notice date, not by the lease expiration date…by then, it’ll be too late! So, if your company's lease expires in eighteen months, and say, you are required to give your landlord fifteen months notice, you will only have three months to make what could be a mission critical decision for your company...and, you may not have enough time to do that!

THE MECHANICS OF RENEWAL OPTIONS

Here's how renewal options typically work: If your company has the option or right to renew its lease, it must notify its landlord of its desire to renew the lease by the renewal notice date. Failure to do so could result in the loss of that renewal option or right. As a result, the company could be forced to relocate within the building or may have no choice but, to leave the building altogether. Or, your company may have the opportunity to remain in its current space, but on terms that may be burdensome to your company or simply unsatisfactory. Depending on how the renewal clause is written, your company's challenges may only be just beginning.

It is common, in some renewal clauses, for a tenant to be required to notify its landlord that it will renew, only after which the landlord is required to define the applicable rental rate and other terms that will be in effect during the renewal period. If, after you provide notice, the landlord presents you with terms that are not in your company's favor, you may have no choice but to accept those terms, because you'll already be committed...what a mess! That's like walking into a Chevrolet dealer, committing to buy a car, and only learning the price after you sign the contract. At Real Estate Strategies Corporation, we council our clients never to agree to such renewal terms when they initially acquire space and we secure renewal mechanisms that are considerably more favorable to them than the above. In other cases, if a tenant fails to give notice on a prescribed date, the lease will automatically renew, possibly on terms that would favor the landlord.

At this point, we haven't even begun to discuss the timing involved if your company elects to relocate. Depending on the nature of the real estate your company occupies, the functional uses of the space itself, the amount of capital your company has invested into leasehold improvements and FF&E, relocating could be an extremely difficult, time consuming, distracting, and costly endeavor. Relocating your company, or one of its facilities, should certainly only be undertaken as the result of a thorough analysis that proved that such a transaction would provide the optimal solution, not because someone missed a renewal notice date! That also assumes, of course, that a sufficient number of available properties exist in a geographic area that will support your current employment and customer base at pricing terms that will also support your company's financial and operational requirements, not to mention your technological and communications needs.

If the right properties aren't available and new construction is the only alternative, plan for fourteen to thirty-six months or longer, for a new building to be delivered, depending on a multitude of issues. Those issues could include the type of building and space your company requires, the availability of land and construction materials, landlord financing costs, construction costs, government entitlements and approval processes, and more.

Commercial landlords tend to be pretty savvy business people. Knowledge of the competitive landscape is most landlords' stock in trade. They stay on top of how many competitive properties exist that could lure away their tenants, and engage commercial real estate brokers and other experts to keep them advised. They usually know the pros and cons of those properties, and the financial wherewithal of competing owners. So, given the above, and the fact that your landlord probably has detailed knowledge of how your company uses its space, what you've invested into it, and how difficult it might be to secure another space and relocate, you may be up against a formidable opponent when it comes to securing the renewal of your lease? "But, the terms of our renewal are already set, aren't they?" you might ask. "So, we can't change then anyway...right?"

See "It Depends!"

Next month we’ll review three important questions your company should ask itself to determine if it can improve the renewal terms that are already contained in its lease.

Andrew B. Zezas, SIOR, is Relationship Manager, Strategist, and President & CEO of Real Estate Strategies Corporation, Publisher of "Business, Profits and Strategy", a monthly online publication read by thousands of business, financial, and real estate executives nationally, and, is the author of two new real estate books, The CFO's Guide to Understanding Corporate Real Estate Transactions and The CFO's Guide to Hiring the "Right" Real Estate Service Provider, both of which will be available shortly at www.thecfosguide.com.

Mr. Zezas is well-known for his ease and informative style of public speaking, and has given talks, presentations, and has lead educational programs for business, professional, government, and trade associations, including the Building Owners and Managers Association, American Management Association, the U.S. Postal Service, RealComm, Society of Industrial and Office Realtors (SIOR), and others. Andrew is National Chairman of the SIOR Tenant Representation Specialty Practice Board, and is a licensed real estate instructor in Texas and Indiana. He can be reached at 908 245 5999 or via email.

Real Estate Strategies Corporation, located in Kenilworth, New Jersey, and serving clients throughout the country, helps companies create and execute Business DRIVEN Real Estate Solutions...and Opportunities, faster and with less risk. Visit www.realstrat.com.

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