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August 2009 |
Miller, Rubenstein,
Hoffman & Hawkinson
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Choosing the right lease term
 In what many are calling the best tenant's market in
decades, companies facing occupancy decisions need to evaluate the trade-off of the flexibility offered by a short term lease with the opportunity to lock in significant discounts and concessions via a long term lease.
Given the instability of today's economy, many companies want to maximize their flexibility, giving themselves options to expand, contract or relocate depending upon what challenges and opportunities could be right around the corner.
Companies looking for short term options have plenty to choose from in today's soft market. Subleases are plentiful; however, they come with their own set of pitfalls from typically having to take the space as-is to remaining subject to
the performance of a potentially financially unstable sublessor.
Those tenants who are not sold on today's sublease inventory can still consider direct lease options. Landlords are excited to get most any rent paying tenant to help improve their bottom line. Since they are counting on today's market
conditions to improve soon, they are happy to sign short term leases with tenants in hopes of a better market when those leases expire, especially if they do not have to invest significant dollars to retrofit the space for a potentially
short term occupant.
On the flip side, long term leases can offer significant savings to tenants who are comfortable making the commitment. They can budget their occupancy costs for years to come without much exposure to inflation or other market conditions.
They can also avoid the hassle of a near-term relocation that can be costly and can create employee and vendor frustration and confusion.
Longer term leases bring more stability to a building which can improve a landlord's prospects for future financing and sales opportunities. As a result, landlords are often more negotiable on lease concessions in return for the long term
commitment. Long term leases also allow landlords more time to amortize construction and transaction costs, incentivizing them to offer more creative occupancy benefits, such as above-standard tenant improvement allowances, prominent
building signage, moving allowances and base building upgrades.
In the end, you have to make a lease decision that works best for your business strategy. There are advantages and disadvantages to both long term and short term lease commitments. Make sure you engage a tenant rep who can best identify
these advantages and disadvantages so you can find the right space and the right lease term that works best for you.
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Subleases hide many pitfalls
 With a broad selection of low rental rates and
well-appointed, "move-in ready" space, today's sublease market can be very attractive to companies looking for a new location. However, there are a number of hidden dangers lurking behind the deep discounts and plug and play office space.
Because subtenants do not have a direct relationship with the landlord, they need to be very conscious of prime landlord performance issues. Without the full cooperation of the sublandlord, a subtenant has very little recourse with the
prime landlord. Additionally, a sublease is typically subordinate to the prime lease, which means that the subtenant can lose possession of its space if the sublandlord defaults. As a result, it is vital for a subtenant to perform
substantial due diligence on its sublandlord to ensure their business will remain solvent throughout the term of the sublease.
The monetary hemorrhage caused by excess space can make some tenants anxious to sublease, creating an ideal situation for avoiding landlord approval processes. When subtenants occupy space without the prime landlord's written approval, the
result can be a default in the prime lease or possibly a voiding of the sublease. Thus, a subtenant should know without question that the sublandlord is abiding by all the landlord consent rules in the prime lease.
Subtenants are typically expected to accept space as-is, which makes ensuring that the space is conducive to operations very important. If a retrofit is possible, subtenants should confirm that the cost of construction is weighed against
the bargain of the rent discount. Particularly, given today's soft market, companies should not ignore the discounts available with direct leases in outstanding locations. In many cases, companies can negotiate for flexible lease terms and
adequate build-out dollars while still achieving significant rent discounts. The bottom line is that there is a very good chance an equally beneficial situation could arise through a direct lease.
In a soft market, subleases can represent great options for companies interested in saving money on office or industrial space. The key is to make sure you properly understand the complexities and risks associated with a sublease
agreement, ensure that all landlord sublease requirements have been met and explore all other options (both direct lease and sublease) that could potentially result in a better option for your needs.
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Working with a tenant representative
 With opportunities for significant lease concessions so
prevalent, it is more important than ever for tenants to count on the expertise of a tenant representative.
Our economy remains volatile and thus major financial commitments like office and industrial leases require substantial scrutiny from qualified advisers. Whether you are considering a relocation, a lease renewal or even a renegotiation of
existing lease terms, it is critical that you have unbiased representation from a real estate consultant who is focused solely on the interests of your company. A seasoned tenant representative understands your needs, the dynamics of the
surrounding market and the best tactics for negotiating with landlords.
Despite claims to the contrary, landlords do not pass on commission savings to tenants that negotiate without representation. The only way to ensure you achieve the best possible lease terms is by leveraging the market. Your tenant rep
will create an environment where surrounding landlords will have to compete for your tenancy by offering the best space for your real estate dollar.
As full service commercial real estate companies continue to merge and expand, the number of professionals committed only to tenants is quickly decreasing. There are brokers who "specialize" in tenant representation within full service
firms; however, most of those firms typically secure more than 70 percent of their revenue from landlord services. This means clients may be signing leases under the guidance of a brokerage firm with fiduciary relationships to landlords.
This can create a serious conflict of interest and tenants should avoid these situations at all costs.
The bottom line is that the fiduciary relationship between a company needing space and a representative of a full service firm is simply not as pure as one fostered with a firm whose entire practice is dedicated to representing only
tenants.
Your company will sign a very limited number of leases in its lifespan. Your landlord, who negotiates leases daily, has a tremendous advantage over an un-represented or under-represented tenant. Do what is best for your business by hiring
a non-conflicted tenant representative. Every time.
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