Commercial lease transactions: The top 10 mistakes tenants make

Everyone loves a big office lease transaction. Landlords and developers with vacancies in their trophy buildings get excited about the prospect of a new tenant. Agent and tenant representatives start short-listing the sports car they will buy with their commissions and payments. Architects and fit-out specialists visualise ‘best of breed’ workplace solutions.

CEOs and CFOs have the chance to indulge themselves in their own importance as they are inundated with invitations for lunches, sporting events and a plethora of marketing gimmicks thrown at them by the real estate community. Facility managers suddenly enjoy enhanced status within the organisation and start spending more and more time with the CEO as the deal closure nears. But in this feeding frenzy of conflicting objectives and agendas, mistakes are made. And despite the overload of information available in the market, these mistakes tend to be repetitive. Quite simply, tenants appear not to learn from their own, and others’ mistakes. So, what are the ‘top 10’ mistakes persistently made by companies in new lease negotiations?

1. FOCUSING ON THE TRANSACTION, NOT THE STRATEGY

Too often lease negotiation is precipitated by an event, be it a lease expiry, merger, or an unsolicited approach by a developer to move to a new development. However, in the excitement of the ensuing transaction, corporate strategy is often ignored. The negotiation tends to focus only on the key financial terms of the lease – the trophy benchmarks of ‘deal junkies’. As a result, the impact of the transaction on the portfolio strategy is frequently forgotten. Critical terms of the lease affecting the future, such as rent review, expansion and contraction rights, make-good obligations and the like – the keys to future corporate flexibility and portfolio performance – seem to have very low priority. That is, until the absence of such terms adversely impacts the company sometime down the line.

2. UNDERESTIMATING THE TIME THE PROCESS WILL REQUIRE

Companies that do not have a good grasp of the critical dates in their lease regularly get caught out by not having sufficient time to fully engage with the market in seeking alternative premises. This is particularly true if a preferred alternative has to go through the development process – a long and tortuous procedure seldom understood by those not in the commercial property market. This lack of remaining lease time often results in companies having to stay in existing premises and negotiating a soft lease renewal with the landlord. A successful relocation transaction must include time for a needs analysis, site and property selection, negotiations, executive approval, legal documentation, planning, fit-out, relocation, and even time to undertake make-good obligations. All need to be completed within the remaining period of the lease – or else the landlord will demand compensation as entitled as per the terms of the lease. As such, commencing the process at least three years prior to the lease expiry date is prudent for large relocations. Viable alternative location options are essential to keep current landlords honest and to encourage their best offer at lease renegotiation.

3. NO CLEAR NEEDS ANALYSIS OR ACCOMMODATION BRIEF

Zero-based budgeting is a well-accepted business principle to ensure past excesses are not factored into future plans. Unfortunately, too often market briefs for new offices are based on existing space metrics increased by some factor to allow for future growth – and this is also frequently based on an outdated metric such as square metres per person. New and emerging alternative office techniques, supporting a ‘form following function’ philosophy and distributed workplace practices, are ignored. In addition, a comprehensive business needs analysis and accommodation brief should identify adjacencies, location alternatives and flexibility objectives – all necessary to make the right accommodation choices. Ideally, these briefs need to be undertaken by workplace and business process experts not associated with designers, as this way the design solution does not end up driving the workplace outcome to the detriment of the overall workplace portfolio strategy.

4. FAILURE TO INTEGRATE CORPORATE SUPPORT ACTIVITIES INTO THE RELOCATION PROCESS

Company relocations are not just about facilities and property. Relocations that do not take into account human resources, information technology and other corporate support functions will be to the detriment of the whole organisation. This is particularly the case as information technology, human resources and property solutions become interchangeable as substitutes in new corporate business process strategies. As these business processes become more integrated, the real challenge in relocating is determining how to plan for future ‘bums on seats’ – be these employees, contractors, outsource service providers or teleworkers. This is even more daunting if facility management is not working hand-in-hand with all the support components within the organisation.

5. NO AGREED OBJECTIVES OR EVALUATION CRITERIA PRIOR TO PROCESS COMMENCEMENT

If relocation objectives and weighted evaluation criteria are not determined upfront and linked to portfolio strategy, they can easily be manipulated to support a specific outcome. Although government agencies are usually good at setting evaluation plans up front, quite often the evaluation criteria and weightings are not well thought out and do not link back to objectives. Sometimes the evaluation plan can result in some surprising outcomes, particularly if it was not ‘pilot tested’. The private sector regularly seems to fall into this trap – having vague ideals and seldom developing robust evaluation plans in the first instance.

 6. NO PROJECT SPONSOR WITH A CLEAR MANDATE AND AUTHORITY TO ACT

A lease negotiation and relocation is a major undertaking for any company. The workplace is the key to conducting business and clearly no glitches can be tolerated. Too often the facility manager is treated as an ‘information gatherer’, rather than the project manager, duly appointed with accountability and responsibility for the entire process. It is essential to know who is driving the process in the company and what other responsibilities that person may have, as relocations can be all-consuming. Other key issues include:

• How are decisions made and who is accountable for the accommodation outcome?
• Can quick critical decisions be made?
• Does the designated project sponsor have the necessary skills and experience? Remember, it is usually a long time between deals and the previous major relocation sponsor may have moved on.

A CEO should be wary about assuming the project sponsor mantle. Indeed, a significant high profile relocation led by the company CEO can be the first sign of that company’s demise, as overseeing such a time-consuming project frequently means having to ignore other vital, more core responsibilities.

7. IGNORING CHANGE MANAGEMENT IMPLICATIONS, BOTH GOOD AND BAD

Any major relocation will involve significant change for an organisation’s workers, especially if new workplace practices are implemented. A relocation must be positive and well managed. Change management does not happen without planning. It is important to remember that any move is about accommodating employees – any company’s greatest asset – and as such it is vital that it be a positive experience. Relocations can be great mechanisms to facilitate significant corporate change – and may only be possible again at the end of a long lease. Given this, it is important not to miss the chance to use the move to drive new directions in corporate culture. In fact, a need to drive change may even by the catalyst for relocation, an existing lease commitment notwithstanding. Certainly the value that can derive from a change in corporate culture can be far more significant than the cost of carrying a lease tail.

8. BEING GUIDED BY ‘FREE’ REAL ESTATE BROKING ADVICE

In business, as in life, there is no such thing as a free lunch. Taking ‘free’ advice usually means that the company will pay in kind through sub-optimal decision-making. Even the most professional agent or broker cannot help but be subjective in the advice they provide when their main focus is to drive the deal to get paid. Also beware ‘free’ tenant representatives who arrange to obtain their fee from the landlord – the relocating company will still pay the free wrapped up in the deal. Likewise, be careful of the negotiating egos of some tenant representatives when subtle changes start to occur in the market. Taking an overly aggressive stance may provide an adrenalin high for the ‘deal junkie’, but is also known to have left some major tenants ‘high and dry’ with nowhere to go.

9. FAILING TO APPOINT PROFESSIONAL CONSULTANTS TO CONDUCT DUE DILIGENCE

Companies without internal facility management and real estate resources could well benefit from specialist independent advice. Such advice might include engineering and related due diligence; rental valuation; change management; design and project management; removal and relocation logistics; IT and systems; lease commercial and legal terms; negotiating; and other specialist advice. It is critical for companies to realise the complexity of major relocation decisions, as well as the range of skills required to support them. Indeed, independent advice may be essential to avoid the inherent conflicts of interest that exist within the property markets.

10. BEING PURELY DRIVEN BY COSTS

Cost is always important, but too often all other accommodation objectives that can add far more corporate value are ignored. For example, taking the least expensive premises may not support the human resource objective of attracting the best available talent. Similarly, taking the cheapest premises may not reflect the marketing message of the company - something many inexperienced retailers usually discover too late. Cost comparisons are also often poorly calculated, failing to cover the total cost of occupancy over the lifecycle of the lease. A true measure of cost in relocation decisions should be the full cost to business, including salaries, travel, write-offs, depreciation, relocation expenses and the like. These need to be analysed based on cash flow, profit and loss and balance sheet impacts over the full lifecycle of the intended occupancy.