Deal Or No Deal?

So your store lease is up for renewal. Polish your reading glasses and sharpen your pencils: It's time take a gander at the fine print of a document that's critical to your success.

"It's really important for any retailer to negotiate good lease-renewal terms," advises Sharon Kahan, first vice president of CB Richard Ellis, an El Segundo, Calif.-based global real estate brokerage firm. "After all, you have to live with your lease for a long time. And rent is very often your biggest expense after personnel costs."

Getting a bead on your landlord's intentions is especially important in today's rental market, adds Kahan. When the economy is revved up, the increased demand for available space means retailers get hit with unexpected rent increases at renewal time. If you're in a low vacancy rate area, you can anticipate some con.ict with your landlord. And the longer it's been since your last such skirmish, the worse the news might be. "In the case of older leases you may be paying an under-market rent right now," warns Kahan. "Quite frankly, your sales may not support the new rent your landlord may want." If this is your situation, it may help to prepare information that will convince your landlord to see your side of things. "Be prepared to discuss sales if you are so inclined, to show the landlord where you need to be as far as rent." It's always in the landlord's interest to re-enlist a current tenant who has proven reliable.

An early start is advisable, adds Kahan: Delay too long and you may be left in a bad negotiating position because you have too little time to shop for alternative space. Your landlord may even try delaying tactics, which can eventually cause you to sign a poorly examined document when a move to new quarters is no longer an option.

ASSESS YOUR AREA

Start by getting a handle on the vacancy rate in your area. (For some pointers, see the sidebar, "What's Your Local Vacancy Rate.") Once you have a grip on how the local rate affects your negotiating position, look at the following 12 ideas for improving the terms of your own lease.

1. Check your renewal options.

Does your lease provide for a renewal option? This is the first thing to find out. If you have already renewed your lease once, there may be no additional automatic options left, which can pose problems.

"Sometimes retailers negotiate better renewal option terms," says Susan Hays, a principal with the Hartford, Conn.-based law firm of Updike, Kelly and Spellacy. "They may say, 'I would like a five-year lease and the option to renew for an additional two five-year periods.' If they have a really good site, this is a way to lock the landlord into allowing them to stay longer."

Obviously, landlords would rather have a single 10-year lease than a fiveyear one with an option to renew. However, they may agree to options if you will guarantee escalators in terms of rental amounts. As with any other negotiation, options are matters of give and take.

2. Find an alternative before negotiating.

Few tenants take time to formulate a walk-away alternative. But it's crucial. Besides leverage, there's another benefit to having an alternate location: You can visualize your negotiation as an entirely new piece of business rather than an alteration of a previous agreement. Consider every critical term of your lease a negotiable one.

3. Watch for unfair escalation clauses.

Outside of the base rental rate, the stickiest part of a lease is often the operating-expense escalation clause. Sometimes called a "passthrough clause," it calls for your rent to increase according to a formula that determines your prorated share of the actual rises in a building's operating expenses.

Unfortunately, many landlords view these clauses as profit centers while tenants see them as methods for landlords to stay even — attempts to eliminate expenses that relate to the risks of ownership. These include marketing costs for the building, amortization of maintenance, energy conservation and cleaning equipment. Capital improvements to the elevators and other building systems should be amortized rather than expensed directly.

If you are in a shopping mall, be especially wary of increases in energy costs for heating and cooling the common areas, warns Hays. This is of critical importance today, given the cost of fuel. Does your lease make you responsible for a portion of such costs. Then try to put a cap on your exposure, or negotiate some monthly averages to avoid surprise hits to your bottom line.

4. Obtain "finish allowances."

Your space has undergone some wear and tear over the years and could use a facelift. The landlord will have budgeted some money to fix up your space in the event you decided to leave. How much of that money can you obtain for repainting and refinishing. Try to get some repair and maintenance of your interior space, including paint, carpeting and ceiling tiles.

5. Change base year to the current year.

Operating-expense escalation rates calculate the increases in such costs over a "base year," which is generally the year your lease began. When you do renew, make sure the base year is adjusted to the current year, rather than to some former date.

6. Beware a change from gross lease to net lease.

In a gross lease, the landlord bears all of the risk for repairs and maintenance. In a net lease, the tenant pays for a portion. Know which kind of lease you have. And beware of an unannounced change in the lease that can leave you liable for thousands of dollars in additional expense.

7. Assure your right to audit operating expenses.

So you've agreed to pay a portion of the operating expenses for your property. But how can you make sure the numbers from your landlord are accurate. Make sure your lease allows you to audit bills in a timely fashion.

8. Don't waive your right to obtain money due.

As part of your renewal, you may be asked to sign an attachment to the effect that the landlord does not owe you any money. Prior to signing, perform due diligence. Some categories to watch: overpayments on prior leases, tenant improvement allowances, and rebates or free rent with your previous lease.

9. Restrictive sublease clauses.

Try to preserve your right to sublease space without your landlord's written consent. If your landlord insists on the right to approve sub-tenants, try to limit the time allowed to reach a decision. Some leases allow the landlord 90 days to approve a sublease. In that time, the sublessor will have long since decided to rent some other space.

10. Beware holdover clauses.

Suppose that you are unable to move to your new location smoothly and on time. This condition, called a "holdover," may have come about through no fault of your own. All of the moving companies, for example, could go on strike before moving day. If your lease calls for onerous payments to the landlord in such a case, your profits could be hit hard.

11. Original condition clauses.

Some leases contain language that requires you to leave the premises in their "original condition" when you depart. Try to get this term defined specifically so you are not penalized for normal wear and tear. And have a dollar limit placed on the value of any required restoration.

12. Eliminate personal guarantees.

Maybe when your business was young, your landlord required a personal guarantee. Times have changed now that you have proven yourself. It's easy to forget the existence of these guarantees, and that you are now exposed for more money because the rent has gone up. Negotiate out of the clause.

Plan ahead, know your local vacancy rate, and study the terms of your lease carefully. "A lease renewal is a negotiated event," says Craig Melby, president of The Melby Group, a real estate consulting firm in Palm City, Fla. "The last thing you want to do is just sign on the bottom line. You can save thousands of dollars by renegotiating the terms of your lease."

What's Your Rate?

YOUR SUCCESS AT negotiating a better lease depends largely on your local real estate vacancy rate. If you are in a major metropolitan area, try visiting the Web site of the El Segundo, Calif.-based real estate brokerage firm of CB Richard Ellis. Point your browser to cbre.com, click on "Research Center," then on "Local Reports Worldwide." Select your city from the over 200 entries in the drop-down list. Click on "retail" and then click the "submit" button.

Also, check with local real estate brokers to get a handle on the current vacancy rate and what they expect to happen over the coming months. Many publish current market analyses on their Web sites.

Don't rely too much on citywide reports, though, because demand for space can vary widely in different parts of town. "The reality in terms of your local vacancy rate may be far different from the city report," advises Sharon Kahan, first vice president of CB Ellis. "Every neighborhood is different; every block is different." So interview a number of local brokers for readings.

As a general rule, if a market has less than a 7 percent vacancy rate, it is considered a "landlord's market," which means the landlord has more leverage when it comes to negotiating terms.

Getting Some Help

The Counselors of Real Estate (CRE) is a Chicago-based organization comprising real estate, financial, legal and accounting firms that specialize in property lease negotiations. Search for consultants in your region at cre.org.

Another organization is ITRA Realty Group, a global association of tenantoriented real estate brokers. Search their site at itrarealtygroup.com.

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