Top 8 Commercial Real Estate Leasing Mistakes
It’s pretty easy for the average business owner to make a mistake signing a lease.
There are several reasons for this. One of the main ones is that they just want to get it over with.
However, falling into the pitfall of signing the wrong lease can have a major impact on your business.
Whether endeavor to lease your first space, seek to renew your existing lease, or are shopping around for a new one it’s important that you avoid these.
Here’s our list of the Top 8 Real Estate Leasing Mistakes to Avoid, beginning with perhaps the most fundamental part of running any business.
Failure to Map Priorities
One of the most important things for any company to do is determine short and long term goals—and prioritize based upon them.
Honestly, this should be at the core of all of your decision-making processes. Hunting for office space should not be excluded from the process of prioritizing company goals.
So make sure you sit down, take a breath, and write out what is important to your business now and what will be vital for its growth in the future before you even begin looking.
You might start a checklist beginning with some of the following questions:
What should our space say about our brand?
What kind of layout will benefit my business?
What can my business afford to pay?
How much office space do I really need?
Do we have special technological requirements?
Can we gain a competitive advantage through our location?
These are just a few of the things that need to be considered before you dig into potential locations. Hint: there are more specific questions that pertain to your particular business.
Just remember, there is nothing more powerful than knowing what it is you actually need and making decisions based on those needs.
Failure to Choose a Reliable Commercial Broker
The right commercial leasing broker will help you avoid all other potential leasing mistakes.
That’s because they have the expertise to identify what it is you actually need and help you find properties that can fulfill those requirements.
The vast majority of all leases signed in Atlanta have a broker involved on both the landlord and tenant sides.
Still, some companies believe that they are better off not hiring a broker. The most common reason is that by avoiding a broker’s commission, they will achieve a lower rental rate.
However, that kind of thinking is flawed.
A good broker will generally produce a 10%-15% improvement on the deal terms. This makes a 2% commission sound more than reasonable. Considering that a space lease is usually a company’s 3rd largest expense, the potential impact on your bottom line is pretty obvious.
The fact is that your company will likely only deal with a lease every 3 to 5 years, but a broker deals with them every day.
● Negotiation of non-financial deal terms
● Personal guarantees
● Termination and expansion options
● Operating expense stops
Because an initial space search or renewal can take anywhere between 60 days to 2 years, you’ll want to make sure that your broker is someone you can both trust and get along with.
Finally, you want to make sure they are familiar with the market in which you are interested.
Map your priorities and hire the right broker and you’ll greatly increase your chances of ending up with a great lease.
Failure to Take Enough Time
From here, perhaps the next most important key is that you give yourself enough time to go through the full process.
If you have a new company looking for its first lease, you might be able to be more flexible. But if you are in the market for a renewal, you need to take special care to get things started early.
Many tenants fail to give themselves enough time to explore the market, find comparable alternatives, and use those alternatives as leverage with their current or prospective landlord.
There is some debate when you should start exploring the market. In the end, it depends on company size, internal goals, and future growth needs.
However, you should always allow at least 3 to 6 months to prepare for a move. If you come to landlord with less than 3 months left on your lease, they’ll know that you don’t have time to move out of your space before you enter a holdover period. Thus you lose your leverage.
Misunderstanding True Costs
Failure to understand the true costs associated with a space is one of the easiest mistakes for companies to commit.
It’s pretty easy to get so focused on rent that you fail to see the other expenses that go along with a space.
Make sure you factor in IT and communication service costs, heating and air conditioning fees, furniture expenses, the cost of moving, and insurance premiums.
Then take extra care to note any expenses directly or indirectly affected by the lease you sign.
For instance, operating expense pass-throughs often trip up unwitting tenants:
If you sign a full service lease, find out what your base year is going to be on the lease. Then, look through the building’s historical operating expenses and see how much they have risen over the years. Increases above the tenant’s base year gets passed through to the tenant.
This is yet another way that an experienced leasing broker can help clarify things for you.
After all, the clearer the picture of your expenses, the clearer your decision making.
It’s okay to get fixated on price, just understand all the things you’re signing up to buy.
Focusing on Price Only
Businesses may make this mistake simply because of their economic situation, their perception of where the broader economy is headed, or because they’re defensive and want to be perceived as a “tough negotiator.”
However, the cost of a space is not the only way your property will affect your bottom line. You have to think of the bigger picture.
We’ll go into some of the major factors here such as location and choosing a space that actually fulfills your needs. However, the list of potential considerations can get pretty long.
Ask yourself questions like:
Are there any safety concerns with this property? How will this space affect our brand’s image?
Is there adequate parking and public transportation? Is the ownership local? Will this location offer us adequate room for expansion? What’s the owner’s economic situation?
There are, of course, many questions that might be unique to your business. However, the several mentioned above consistently play a role.
Choosing the Wrong Location
Everyone knows the real estate mantra:
“Location! Location! Location!”
For many businesses, no other factor related to your property decision will affect your bottom line more profoundly. However, it’s easier than one might think to choose the wrong location.
The major problem is that you probably won’t be able to correct it for 3 to 5 years.
That’s why it’s important to take steps to check traffic during all hours, review a list of the building’s other tenants (and the clientele with whom you will be sharing common areas), and find out about any traffic “improvements” or major developments scheduled to commence around your prospective choices.
Choosing an Inadequate Space
This mistake is easier to make than most business owners would expect.
On one end of the spectrum, the company’s money is wasted on unused space. On the other end, not enough room can hamper growth or reduce efficiency.
We like to recommend two things to reduce the chances prospective tenants go awry here.
The first is to hire a professional architect to map out a space plan for your company before you go out looking for properties. Have them factor in your potential growth needs over the next three to five years and which departments needs to be close together.
This is one of the best ways to avoid leasing or buying the wrong sized spaced.
The second thing to do is prepare for it in the lease. As a tenant, you should make sure that you have favorable lease language that allows you to get out of the lease if the landlord cannot accommodate your growth needs. Similarly, you want language that allows you to sublease easily if you plan to downsize.
Growth and downsizing can both come unforeseen, which makes preparing for it within the lease even more of a nobrainer.
Signing the Wrong Lease Term
Two more nobrainer mistakes that too many businesses fall victim to:
Signing too short a lease term or signing too long a lease term.
Both stem from a lack of understanding of commercial real estate markets. You see, these markets are cyclical. They go from favoring tenants for a few years to favoring landlords for a few years and then back again.
Understanding where we are in the cycle can make a big difference.
When the markets favor tenants, you want to shoot for long leases with certain provisions to get out early if needed. Generally, landlords will go to great lengths to retain or acquire new tenants during these times.
When the pendulum swings the other way, you’ll want to work hard to find a short term lease that still fits your needs. More likely than not, by the time your lease is up, the market will have reversed in your favor.
This is yet another area where a topnotch broker truly shines.
Do everything in your power to avoid all eight of these potentially costly leasing mistakes and you’ll greatly decrease your chances of signing a bad lease.
Truth be told, focusing on failure to map priorities and failure to choose a reliable commercial broker will go a long way to making sure the rest of the list is taken care of.
If you’re looking for help with your next lease, don’t hesitate to contact Atlanta Leasing & Investment today!