You are a business owner with barely enough time in the day to run your company, much less worry about real estate. Someone on your staff reminds you that your lease will be expiring in a few months, so you start to think about what that will mean. Mostly, your current space works for you. You might need more or less space and the carpet and the paint might need replacing but it works. You are comfortable and moving is a hassle!
At the same time, you begin to notice all of the “Available Space” signs on your way to and from your office some in nice buildings. You call some of them and discover that although there is a sign in front of the building, there isn’t necessarily any space that would suit your operation and the rents seem about the same. It all becomes a little overwhelming, and soon you contact your landlord and “ask” him if you can renew your lease. He says, “Sure, I’ll send you a simple lease amendment. Just sign it, and you’ll be good for the next five years.”
You have taken the path of least resistance; done deal. You read the amendment and notice that they are going to repaint your space and drop your rent a few cents per square foot but wonder if they are really giving you a “market” deal. Still, you’ve have your business to run, so you sign it, and it goes back in the file until next time.
The high costs of being a landlord’s dream come true
You are a landlord’s dream come true! You may have saved some time, but it came at a high cost – usually 20% to 40% or more in occupancy costs and with short and long term legal/economic exposure that would surprise you and cause you to not to renew your lease if you knew they existed.
Here are just a few of the items that you might have missed:
- Lower rent (those continued escalations over the past years have caused your rent to be above market for comparable space).
- Free Rent (most sub-markets are seeing as much as 1 month free for each year of lease term).
- Improvement allowance (air conditioning/heating, new carpet, paint, move walls, lighting upgrades, etc.).
- New base year for real estate taxes and other operating expenses, limiting which expenses are even allowed and can increase and be added to future years.
- Options to expand or contract your space or to renew or terminate your lease early; and one of the most common, rent reductions a year or more in advance of when your current lease term ends.
Most importantly, there are hidden landlord profit centers in your lease. You may never have heard of them, and don’t understand that they can increase your rent, but they’re very real, and expensive:
- Measuring your space and the building common areas incorrectly.
- Operating expenses with no limits.
- The large amount of your share of property tax increases due to the sale of the project will surprise you.
- Earthquake insurance costs, an expensive type of insurance, where you pay your share of a shocking 20% deductible of the entire project’s value (which could bankrupt many tenants).
The lease’s clauses are usually more important than the economics of the deal itself and many times it would save you money to have a higher rent but better lease clauses!
If your rationale is that your landlord would not want your broker involved you are correct. Re-read above, and you’ll know why. It’s not primarily because your landlord doesn’t want to pay a broker’s fee. It’s primarily because many of the countless economic deal points and clauses in your lease that you are not equipped to negotiate are landlord profit centers. Keep in mind that landlord rents include paying a broker commission already so by not using a broker, you have just saved the landlord even more money.
And remember, not all real estate brokers are created equal. Make sure you find one that does more than find you a location and negotiate the basic economic terms of your deal. Many brokers and real estate attorneys don’t even know where all of the hidden lease profit centers are. Unless a broker has been employed directly by the landlord, it will be almost impossible to find these profit centers.
DJM Commercial can help you save money by making sure you know everything you should about the leasing process. Directing the largest real estate companies in California for over 25 years and completing over 600 lease, sale, and purchase transactions has given David Massie, President of DJM Commercial, a unique set of experiences that other brokers simply don’t have that will save you money.
For all of your leasing and other commercial real estate matters, please contact David Massie at 805-217-0791 or david@djmcre.com or look us up on the web at DJMCRE.COM.