Businesses know that being proactive in all areas of their practice is beneficial. Leases in real estate are no different. When the time comes to renew your lease, the goal is to have your landlord competing for your business.
In order to make this possible, preparations must begin far in advance of lease expiration. That said, lack of business visibility likely gives you pause in embarking upon a lease negotiation.
Whether it’s customer contracts or space requirements, you might not be ready to make a decision more than 9, 12, or 15 months in advance. We understand that and want you to be able to take control of your timeline. We’re going to discuss how proactively creating viable options before you’ve decided upon what you want, gives you the flexibility to make decisions later with the best results.
How can I take control of my timeline?
Having leverage is critical when it comes to controlling your timeline. In this market, landlords have the upper hand. As a tenant, even though you may have no intention of moving, the only leverage you have is your ability to relocate. In order to harness that leverage, you need to prepare to renew or extend your lease by setting up viable options for relocation.
When should I start preparing to renew/extend my lease?
Tenants should start thinking about preparations at least a few years in advance. In order to determine your start date, let’s begin by working backward from your current lease expiration.
Keep in mind, starting this process does not commit you to anything. Instead, it creates leverage and multiple scenarios, which make you better suited to secure a lower cost lease.
Every lease is different and every tenant has different needs; so, the timeline for each business will follow those needs accordingly. You will need to consider these 4 things.
- How long will it take you to move?
- How long will it take you to build up inventories?
- How long will it take you to identify new options to move?
- How much work will be required to get a new lease negotiated?
Let’s look at a very typical scenario.
The lease for an injection molding plant expires on December 31, 2020. The operation has significant equipment invested in the building, which makes moving operationally difficult, expensive, and time consuming.
Start by working backward from December.
December 31, 2020
6 - 9 Months
It will take between 6 and 9 months to have all new machinery installed in a new building.
It will take about 6 months to have any modifications or improvements made, including permitting, municipal approvals, and design construction.
This means you’d want your lease signed no later than January 1, 2020, one year before your current lease expiration. So, what does the timeline look like in order to get a signed lease? Let’s keep working backward to find out.
January 1, 2020
3 - 6 Months
You’ll want 3 to 6 months to pursue, negotiate, and procure state, local, and municipal incentives.
3 - 4 Months
3 to 4 months should be allotted to negotiate business terms and to compete all options against each other. During this time you should start building extra inventories for the transition period.
3 - 4 Months
You will need 3 to 4 months to identify, tour, and evaluate buildings that would suit your needs.
January 1, 2019
Start looking at the market
Project kick off should generally begin at least 2 years in advance of lease expiration. However, this varies based on the nature of your operations/equipment. More time may be required if you need to make new hires or even build a new workforce.
Again, remember that this is all hypothetical and commits you to nothing. BUT, in order to create leverage, you must be in a position where you have real and viable options created in a timeframe that would allow you to act on one of them.
This may seem like an overwhelming project, and it is. It can zap resources and take a lot of time. The landlord understands this. They know what it takes to move an entire operation.
In other words, if you haven’t taken the necessary steps to prepare for a relocation by the time you approach the landlord, they will know that you are not moving and you’ll lose your leverage.
Many tenants hire a broker a year in advance of lease expiration. At that point, they are setting themselves up for a pretend negotiation. The broker does his or her best to get the tenant a good deal, but there isn’t any real leverage. If the landlord won’t negotiate, the tenant will have to stay put and pay whatever price the landlord requests.
When you begin the renewal process early you control the timeline. This eliminates your risk of losing the opportunity to renegotiate the terms of your lease. There’s much more to renewing your lease than simply signing on the dotted line. When you allow yourself sufficient time, you can take the necessary steps to create the best possible transaction.
For more information about lease renewal and restructuring, check out 4 Things to Consider Before Renewing Your Lease.