When leasing commercial real estate having a more flexible lease will allow you to ensure the the building you lease space from will accommodate your current and future needs. Flexibility is key especially if you have a company with unpredictable growth. Below are a few ways to make a commercial lease more flexible for your business.
- Do a Shorter Term Lease – longer leases commit you to one particular space for 3-5 years or longer. What if you are a new business that is just getting started? What if you plan on hiring 20 more employees by the 12th month? If you are in a longer lease and the building does not have anymore available space you will be forced to lease additional space in another building or have to sublease your space or end up eating it for the remainder of the term. If you are able to negotiate a shorter lease (1-3 years) then you will have the ability to ensure that your business is going the way you want it to before committing to a longer term.
- Negotiate a Lease Termination Option – Landlords don’t like giving these options however if you can get away with it then do so, especially if your only option is to sign a longer lease. You never know how quickly your company will grow or whether or not your business is going to make it. Let’s say you have to sign a 5 year lease to get the tenant improvement allowance needed to build out the space. If you can negotiate to have the option to terminate the lease after the 3rd year for example then you will have a little bit of flexibility. The caveat however is that you will more than likely have to pay some sort of early termination fee, which more than likely will be the landlords unamortized cost of tenant improvements & lease commissions as well as a predetermined number of rental payments.
- Get a Renegotiation Clause – This one may be tough to get however if you can get the landlord to agree to give you the chance to renegotiate aspects of your lease (e.g. rental rate, tenant improvement allowance, etc) at some point in time this will help you to make the lease more flexible. Just keep in mind you might have to trade more term.
- Sublease & Assignment Options – Make sure you negotiate to have the ability to sublease all or a portion of your space to a 3rd party. What if you outgrow the space before the lease expires? What if you go out of business? What if you don’t need to use all of the space and wish to sublease a portion of it? What if you sell the company? These are reasons why you want to ensure you get sublease and assignment options.
- Expansion Options – This will give you the ability to take more space if needed. This may come in the form of a right of first offer (ROFO) or a right of first refusal (ROFR). With a ROFO the landlord must offer any newly available space to you before marketing it to others. A ROFR means the landlord has to offer you the deal that was agreed to with a 3rd party.
- Contraction Options – Opposite of the above. At any point in time if you need to downsize with this option you would be able to give back a portion of your space. Keep in mind this is a deal point that only large companies have leverage enough to negotiate, especially if they are leasing more than one floor of a building.
The above are a few ways make a commercial real estate lease more flexible for your company. Just remember you will have to know how to negotiate these items. Having a commercial real estate tenant representative help you can increase your chances of success and their service does not cost you anything.