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Despite having a roller-coaster real estate market, people tend not to take lease renewals all that seriously. They see it as simple, thinking they can just call the landlord and get their new rate. That way of thinking can cost your firm a lot of money. Lynn Drake, President at Compass Commercial LLC ITRA Global of Michigan suggests if you’re looking into renewing your lease, make sure not to overlook these 3 critical steps.
- BASE YEAR: The number one thing I see people forget on their renewal is resetting the base year. After all, you are most likely renegotiating the rent. Let’s use an example. You have 10,000 s.f. and just came off a 5 year lease. The annual pass through over 5 years can be as high as $2/s.f. If you forgot to reset, your firm will now be paying $20,000 more per year.
- REREAD TERMS: Sounds simple, but most people don’t read their lease when they sign it initially, so logic follows that they won’t read it again at the time of renewal. What to look for? Things that are going to be taken away, or loss of rights. For example, let’s say you were paying $100/month for a parking spot. The original lease had a set rate. If you don’t go back and renegotiate your parking spots, you could pay double, or lose them all together. Think such a thing never happens? I’ve been in this business for 35 years, and have seen it happen more times than I can count.
- MARKET COMPS: Make sure you know the rental rates. Many times, I’ve seen people look at 3 lease rates from 3 landlords, and not realize one is triple net, one is modified gross, and the last one is gross. If you don’t know the difference between those three things, you could be in for a very rude awakening when you get a bill from your landlord for these expenses.
Beware of the last minute gotcha!
Lynn notes,”… if your business is doing well, and you are happy with your current landlord. You may or may not notice that your lease is expiring in less than a year. You might think, since there’s been no word, that your landlord forgot. I guarantee you, this is not the case. Maybe you’re thinking the landlord will allow you to go month to month. They probably will, as you will most likely be charged significant hold over fees for doing so—something you’re probably not aware of!
What is a hold over fee? Let’s talk it out. 99% of the leases we have reviewed have a hold over fee of 125% to 200% or more. Which means that on a lease that is $1,000 a month, if you stay even one day past your expiration date, you will pay $1,250 for that entire month. If you have a 200% hold over fee, that cost will skyrocket up to $2,000. Even if you’re just a day over your expiration date. Most leases don’t prorate hold over fees, so a day can cost you more than an entire month’s rent.
Sneaky, right? This is what I call the last minute gotcha! Your landlord often counts on you not noticing these sorts of clauses in your lease, and most will contact you just a month before your lease expires, offering you a renewal option. This isn’t a lot of time to find a new space, and most likely, the rate they’re quoting will be over market. They may tell you to go ahead and move, but don’t forget—going even one day over will cost you significant hold over fees.”
Lynn Drake’s advice? Plan ahead. Start searching for a new space 6 months to a year ahead of your expiration date, even if you don’t plan on leaving. You need to know your options to play the market right, and you don’t want to end up paying a last minute gotcha!