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Extending Your Office Lease: Should You Sign a Lease Extension Agreement?

As you step into the elevator of your office building one morning, you suddenly realize that your lease expires in three months, and you should probably start thinking about whether to renew or not. Unfortunately, since it took until now for this to occur to you, it is too late to get a great result on a lease renewal. With the magic of the printed word, however, and taking advantage of the fact that you are hypothetical, we will rewind your life back about nine months, so you can do this thing right. (This will also give you the opportunity to not attend that party at which you behaved so badly around Christmas-time. You are welcome.)

The first question is whether you as the business owner should stick around in the current office space or start shopping around. Ask yourself three basic questions: 1) Do I want to relocate for any reason? 2) Do I expect to grow out of the space in the next three to five years? 3) Do I expect to downsize? If you answer "no" to all of these questions, then renewal is most likely your best option. But resist the urge to run down to the landlord's office and start signing his or her proposals--you have a lot of work to do before the signature pen comes out.

Start Early

The first step is to start early, which, with a little help, you have very wisely done. Industry wisdom says that twelve months gives office tenants adequate time to prepare for lease renewal negotiations. At the very least, they should start six months before the lease expiration date, a feasible amount of time if a step or two is skipped.

When office tenants approach their landlord with only two or three months to spare, they relinquish any leverage they may have had in renewal negotiations. The landlord knows that time is running out to find another office space, and he or she has no incentive to grant concessions or negotiation terms that are favorable to the tenant. By starting early, the business owner has time to educate himself or herself about the market, think carefully about what he or she hopes to gain, and find other options in case things don't go well.

Should You Hire a Commercial Real Estate Broker?

Tenants exercising a lease renewal option will often forego the use of a broker, since they are familiar with the space and the landlord. It should be remembered that hiring a broker generally doesn't directly cost the tenant, as the landlord pays for the tenant broker even on a lease renewal. If you are hoping to get some great concessions from your landlord, it might be useful to have a real estate professional with knowledge of market trends, going rents, and lease renewal negotiations on your side.

Hiring a broker also communicates to the landlord that you are serious about looking around for your best deal. It helps to keep the negotiations between you and the landlord on a professional level so that your relationship, whether amicable or tense, doesn't affect the business deal.

Sometimes a landlord will approach a tenant some months before renewal time with two sets of terms--one with higher rent if they use a broker, and one with lower rent if they do not. Hiring a broker is optional, and completely up to the business owner. Of course the broker will tell you that he or she can secure more savings in renewal negotiations than the landlord offered in the broker-free terms, which could very well be true.

Research the Office Lease Market

Next, with or without the help of a broker (now you wish you had hired one!), investigate the market. What are market trends? Is it a soft market where landlords try to attract tenants with free rent and other concessions? What kind of concessions are landlords currently offering? Let your landlord know you are looking around.

Even if you have no plans to move, check out your options. Go visit comparable office space and get a feeling for what is out there. Use what you find in the market to accurately calculate the fair market value (FMV) of your office space. This will be very useful as negotiations commence on the new rent amount. You can even solicit requests for proposals (RFP) from the office spaces that would best fit your needs.

Leverage Your Inside Scoop

Knowing the ins and outs of the building, office space, and location puts you on stronger negotiation footing than when you negotiated the lease in the first place. Now you know that the elevators are crowded and have long wait times during rush hours. You can bring this up and ask for a plan for improving the elevator system. Parking is always in short supply--do you need more, or parking closer to entrances? Are you happy with the signage for your business?

Think about other things you wish you had negotiated the first time around. Perhaps you failed to win a right to sublease your space. Or maybe yearly caps on how much insurance and tax increases could be achieved this time around. Familiarize yourself again with those lease provisions, and know which are in your favor and which favor the landlord.

Finally, what kind of concessions would you like for the office space itself? Does it need new carpet or paint? Has the HVAC system been constantly on the fritz? What about the dishwasher that has been broken for the last few months? Now is the time to ask for improvements.

Negotiations--be (amicably) aggressive!

Now that you have a clear understanding of the market, your options, and your lease renewal wish list, it is time to approach the landlord. Ask for more than you want in order to give yourself negotiating room. Don't be afraid to request some of those valuable concessions that the landlord would give a new tenant. Why not ask for free rent to do some tenant improvements as a renewal tenant? Perhaps the security deposit can be waived since you are a known quantity, and not a risk to the landlord.

Whatever your requests, it is in your best interest to negotiate amicably. A landlord will be more willing to make concessions for a good tenant that maintains friendly relations with management. Realize that while it is cheaper for the landlord to renew your lease, it is also cheaper for you to stay where you are! Look for common ground and share the savings.

To sign or not to sign?

What if you don't like the renewal lease? Fortunately, you have done your homework. If you did not get enough concessions to make it worth staying, you know your options--choose another office space that will be better for your business! Since you have followed these steps for optimal lease renewal, however, you are probably even now enjoying your office's soothing new color scheme and perfectly calibrated indoor air.