Leasing of commercial office space has over the years affected my business quite a lot… generally when my clients have not paid enough attention to the leasing arrangements and they fail to really grasp and define what the lease means and what they have committed to.
A bad lease will generally end up:
- Costing the client a lot in rent – their lack of knowledge and understanding means they sign up for above market price, do not receive a standard incentive or commit to excessive rent rise percentages at each yearly review.
- Delaying the signing of a lease means that any building works cannot proceed, because without an owner consent signature on council forms, nothing can start. We need to have a sensible and realistic timetable to achieve parallel activities, and make sure the lease is in place so that other important issues can be undertaken with certainty.
- A crazy rush to get the project complete because of the delays caused in signing the lease causes the tenant to end up paying additional money to get the fitout complete in a short time. It’s important to avoid crisis decisions that always cost money and being able to understand the leasing process is just part of the relocation process.
The lease is a critical part of the complete process for moving office and not given the attention it fully needs.
Leasing commercial industrial retail and/or specialist space like a medical suite is quite an expensive part of any business’s overheads. Once the lease is signed your business is committed for a number of years to that monthly payment. Rent and outgoings must be budgeted over the term of the lease, together with realistic tax and depreciation estimates, to give a full budget picture before binding commitments are made.
So let`s start at the beginning – it’s all about the company.
- What industry sector are you in?
Pharmaceuticals have different profiles to small engineering companies. Specific industry needs must be defined so that a search for a suitable property can begin.
- Is the business growing or contracting and at what rate?
Review the last three year’s business performance and make projections for the next three, five or ten years. This will help forecast growth. How many metres squared have you leased previously and what do your plans, industry knowledge and growth prospects tell you that you’ll need in the future? Are different parts of the business growing at different rates? Does your current lease or the lease you may be considering have an Expansion Option and if so do you understand how to act on it?
- Why the relocation? Could you stay put and reconfigure?
What impact would this have on your current business performance?
- What is the driver for change – the main reason you need to relocate your office? It may be one of many things:
- Too much space.
- Too little space.
- A developing business line may require different space modelling.
- New business competition.
- Expanding into new markets.
- How much space do you currently work from now and how much space will you need in three years’ time? Try to estimate five to six years into the future.
- What is your industry doing in the marketplace? Is there a revolution like film to digital happening? Will you require the massive space you have now? Because of the way you operate do you need less space but can still grow? Are you about to outsource three departments?
- What is the projected rate of growth over the next three, five, ten years and how confident are you with the predictions? If contemplating 10 years, how is the lease structured to cope? Is there an Expansion clause? What tax position are you in? How is the fitout to be funded?
- If a lease incentive is taken, make sure it is tax effective. You need to be aware of the depreciation and capital cost of the lease to maximise the tax benefits available to your business.
- What is the expiry date of your current lease?
- Do you know your options and how to exercise them?
- How much notice must you legally give your current landlord – a week, a month, six months or twelve months?
- Before an option is exercised, how much is the new rent going to cost? If the option is exercised – you stay where you are – and no rent has been agreed upon, there may be a dispute mechanism in the lease for a third party lateral determination. This is usually half way between the owner and tenant positions. Your lease rate may even come down.
All of these elements define your very real timeline for making decisions on the existing and the new lease. Is there a hatchet clause at the option of rent review?
How much should I be paying?
Search the alternatives in a broad sense to judge the current market rates for space on a square metre basis, use this for budgeting purposes.
- Make sure you fully understand the lease.
- Understand the commitment you’re making.
- Forecast your likely requirements out by three, five and ten years if possible.