In recent news: Jacksonville’s struggle with the Landing spotlights the plight of local businesses and the importance of having a good lease. In this situation, it’s easy to see the benefits bigger businesses get when they have a strongly worded lease (good buy-out terms) and the impact it has on small businesses when they don’t. Chris Byers, commercial real estate agent, recently posted a feisty opinion on his Facebook page (he loves small businesses!) so we asked him to write about it as our guest blogger.
From the Desk of Chris Byers:
There are so many issues to think about when looking for and securing office space. You need to find the right space. You need to negotiate price and basic lease terms. That is just the start. You also need to consult with an attorney to ensure the lease reflects the terms, as well as identifies and communicates the potential legal and financial risks to your business and to you individually. You may also need a lawyer to provide “legalese” translation.
The process starts with having a thoughtful and knowledgeable real estate professional to provide you advisory services to assist with your office search and selection, as well as provide guidance on market conditions, market rates, etc. Once the office is selected, the real estate professional can assist with negotiating basic terms of the lease.
Once the basic terms are agreed to, the owner (likely through an attorney) prepares the lease. A lease is a contract prepared by the owner or owner’s lawyer and will inherently be written to look out for the owner’s best interest.
Many times, business owners think a lease is a one-way contract, where the landlord binds a tenant into paying a certain amount of money for an agreed amount of time. However, lease contracts are two-way agreements where both sides agree to a lengthy set of rights, responsibilities, and obligations.
While an owner may say they are using a “standard lease”, there is no such thing; leases can be modified. However, there are some practical issues to consider when negotiating terms and modifying a lease. A tenant’s negotiating power depends on the strength (or weakness) of the office leasing market at the sub-market level (in geographic terms and in terms of quality of space). Obligations to other tenants, lenders, investors, or insurers may impact the owner’s ability to negotiate. Relative values of total deal versus other deals in a building could affect the negotiation. There is also a cost to both parties when both are paying for attorney’s counsel, so one needs to weigh the cost of modifying a lease against the value of the deal and value of risk reductions. And finally, lease negotiations are the start of a potentially long relationship, so I would suggest diplomacy and reasonability.
Understand your “must haves”, “nice to haves”, and the list of items that are more nitpicky issues (attorneys seem to find them all). Your “must haves” are issues you are willing to walk away from the deal for or where you need to walk away from the deal because costs or risks are too great to bear. Most of your “must haves” should be sorted out well before you go to lease; but sometimes there are surprises when the lease document is delivered. The “nice to haves” are items that may have added costs or risks you weren’t expecting but are relatively immaterial (i.e. air conditioning maintenance agreements) or have low probability of impact.
The lease agreement is a great opportunity to get to know your landlord and for your landlord to get to know you. It is an opportunity to add a little stress to both sides just to see what it’s like to work with each other. Can both sides have a reasonable conversation about real business issues? This is where both sides can decide if it’s worth investing in and obligating to each other. If there is not mutual respect, or if the important goals are not consistent or mutually beneficial, it is probably better to move on. Don’t underappreciate the value of having a good landlord.
Having an office is not only about location, size, and lease rates, rate increases, who pays what expenses, or the amount of free rent period. Can you trust your landlord to maintain the property? How well will they vet other tenants (your neighbors)? What is the quality and timeliness of work they will perform if they provide improvements? If you have an issue, will they respond in a timely manner. Will they respect you, your lease, and your interests?
The office is your business’ home. It is emblematic of your business’ culture to customers, vendors, service providers, partners, and employees. It is a physical representation of your business and should be considered an investment, not just an expense. Backing that investment, needs to be a well-considered lease.
A well-considered lease is strategic about the term of the lease. There is a balance of protecting the value of leasehold improvements, the value of stability, and the value of avoiding the costs and distractions of moving, and maybe even the value of having the best option for your business in the market, where on the other hand, it may be important to have flexibility if the business needs to change. There may be ways to accomplish both stability and flexibly through the terms. Flexibility may be needed for growth, the sale of the business, the shutdown of a business, or perhaps a move is necessary if the customer or employee base moves. There is a cost to adding flexibility.
The goals of landlord and tenant are not always consistent regarding the term of the lease. There are many reasons why landlords would want a long-term deal, but there are also reasons why they would aim for shorter terms. Be aware when a landlord desires shorter terms or if they avoid options for additional terms. Shorter-term deals could affect your ability to control where your business is located. The same detrimental effect can occur if the landlord has terms that could require you to move or vacate with notice prior to the lease expiration. Sometimes this can be triggered through sale of a property or through signing a larger tenant. Negotiating financial protections for unplanned occurrence is something that should be considered if the term is required.
Importance of a Good Lease
If you are operating without a lease or occupying an office on a month-to-month basis, you should always be prepared to move within 30 days, at the owner’s discretion. If a business does not have a lease, the business has very little rights or protection from being dislocated. A business cannot have the flexibility to leave when they choose without the owner also having the flexibility to have you leave when they choose.
A lease establishes a relationship between landlord and tenant and provides the framework that includes the rights, responsibilities, and expectations of each party. While the agreement may be between businesses, we are also talking about relationships between people within the businesses. Each party has its own goals and needs; the relationship is established for mutual benefit. If both parties can’t achieve their equally important individual goals, the relationship can’t be healthy and should be avoided.
One more point on the benefit of a good lease is from a financial perspective. For the tenant, the business can better plan financially for occupancy expenses, years into the future, as well as reduce risks of negative impacts from unexpected issues. Additionally, the tenant can understand the costs in advance to make a change, such as executing lease buyout. For the landlord, a quality lease, with a stable revenue source for a longer determined period, improves the quality of future cash flow, and thus the value of the building. For both, stability of cash flow planning, along with risk reduction by pre-addressing common scenarios effecting cash flow, benefits both parties. That is worth attention in the formulation of a good lease.
Our guest blogger is Chris Byers, a Broker Associate for Coldwell Banker Vanguard Realty in Ponte Vedra Beach, FL. Chris can be reached at 904-513-0202 or [email protected]