Finding the answers appropriate to your situation begin with taking the time to plan far in advance, to carefully review the terms and conditions of your existing lease and ensure you have a full understanding of the pros and cons of a lease renewal or other course of action that can have a long-term impact on cash flow, profitability and your ability to expand the business with additional equipment, inventory and staff.

In this article, we will focus on three key areas:

1) How to prepare and transition to new office space

2) The importance of reading your lease

3) When it is appropriate to consider a “blend-and-extend”

How to prepare and transition to new office space

Start early

Last minute real estate decisions usually result in higher rents, unnecessary costs and limited flexibility that leave a company ill prepared to handle any bumps in the road that come its way. This can negatively impact not only the company’s bottom line, but staff morale as well.

The simple solution is to start the process as early as possible. Begin reviewing your existing lease no less than 12 months in advance of the expiry date for offices of less than 50 employees and 18 to 24 months for larger organizations that need to consider the fact that the ideal building may have to be constructed.

While it may seem tempting to hold off on taking such a long view in the face of more immediate issues such as fluctuating staffing levels resulting from new contracts, acquisition of a new company or unexpected layoffs, leaving things to the last minute can make you a captive tenant with few options. A captive tenant is someone the landlord believes is unlikely or incapable of moving. This can take many forms, such as recent infrastructure invested in a leased facility including big equipment, server rooms or cafeterias that would be very expensive to relocate or replicate.

In any market, there is always a range in pricing dependent on many variables such as the economy, supply of space versus user demand and individual requirements of a tenant. Thus the landlord’s job is to ensure that a tenant pays the top of that range; nothing unfair, just a few dollars a foot higher than his bottom line.

But for a business with, say 20,000 square feet, that few dollars can add up in a big way over the life of a lease. A premium of only $2 a year adds up to an extra $200,000 in costs over a five-year lease, $200,000 drained from cash flow that could have otherwise been used to finance and grow the business.

Getting ready to move

If you have made the decision to move, how should you go about it to minimize, as much as possible, the business disruption?

Again, advance planning is crucial to avoid a logistical nightmare than can distract management from the priorities of running the business and drive the quarter into the red ink. Some points to keep in mind:

• Consider hiring a move manager. Many moving and storage companies or space planners also offer move management. They can help your organization avoid many of the pitfalls that might be encountered during the physical act of the move.
• Develop a moving checklist. There is no better step you can take than to develop a working checklist of all the activities to be completed prior to, during and after an office move. Include which staff are responsible for a particular action item and its status towards completion.
• Engage the new landlord. It’s important to keep your new landlord or property manager up to speed when it comes to the details of your move. Booking elevators, arranging truck parking and getting keys or access cards distributed to staff are just some of the areas where they can assist.
• Communicate with staff. It is crucial to keep staff in the loop and be responsive to any concerns they may have. A change in commute can be a huge issue and your choice of a new location should be governed by what best serves the majority of staff. Also, moving from a hard-walled office space to a more open concept layout can leave staff feeling as if they have been demoted now that their workstation is in “cubicle farm.” If possible, arrange a site visit to allow staff to become familiar with their new space before moving in.

Read your lease

Whether it’s your existing lease that’s been gathering dust somewhere for years, or a new one ready to be signed, take the time to review or read it.

It may seem like simple advice, but reading their lease is something that a disturbing number of commercial tenants just do not take the time to do prior to signing, or re-signing, their office lease. In fact most of our clients are very likely not the same person who handled the last transaction on behalf of their organization and thus do not even possess any of the historical context that was at play five or 10 years ago when the current contract was signed.

That’s why it is so important to read the lease – thoroughly – before any action is taken. This means cover-to-cover, all the schedules and any amendments that might have been made. Take notes and call an expert you trust if you have questions. There are potentially many hidden costs in a commercial lease and several of them come into play only at the end of the contract. So before you decide to talk to your landlord you had better be up to speed on your rights and obligations in order to avoid any nasty surprises.

Restoration/reinstatement obligations

One example of what can be a particularly nasty surprise for the unprepared tenant is an obligation to return the space back to its base building condition. This usually means bare concrete floors and the demolition of all interior walls. In most cases the landlord also has the right to insist on doing the work on the departing tenant’s behalf and at the tenant’s expense. What’s worse is that many leases state that even if you were not the one who did the construction in the first place, you can still be on the hook for the removal.

Many uninformed tenants have had their negotiating leverage eliminated in one stroke when informed by their existing landlord that they would be charged thousands of dollars should they fail to renew their lease and leave.

Despite its widespread use, this obligation can be hard to spot in a lease agreement. If you suspect you might have this type of clause in your lease, call an expert for advice on how to handle it.

The blend-and-extend option

Sometimes, opportunity can be found in adversity, even when it comes to your lease. In a market that is facing rising vacancies and dropping lease rates, such as is currently the case in Kanata, you may be able to reduce your leasing costs through your existing agreement with a blend-and-extend.

A blend-and-extend is when a tenant, typically with a few years of remaining lease term, signs an early renewal agreement with the existing landlord to add a few more years to their current lease. Usually this is done for one of two reasons: to achieve a lower rental rate today, or secure financing from the landlord to offset future construction costs or big investments such as new equipment purchases.

In both cases, the rental rate on the additional term is blended into the existing rate to create a new “blended rate” often lower than the original.

The mechanics of a blend-and-extend are relatively simple to understand. Let’s imagine a 15,000-square-foot company has two and a half years left on its office lease, and is paying $30 per square foot, in a market where the rental rate for a new lease has dropped to $25. Using simple math, if that tenant extended its lease for an additional two and a half years at $25 then the new average, or blended, rental rate would be $27.50.

Understand your landlord’s situation

A successful blend-and-extend, (or for that matter, any negotiation with a new or existing landlord) requires a lot of work and a high degree of market intelligence. Tenants must have a good idea of their landlord’s current bottom line, or they are setting themselves up for a failure before they even begin.

Do your homework. Talk to other tenants in the building or in the business park to get a sense of where the market is heading. Are there any big leases expiring close to your own in your landlord’s portfolio? Will they be eager to lock down your tenancy or will they be happier to wait a few years in hopes the market recovers? This is information you must have because, rest assured, your landlord is a local market expert and certainly takes the time to stay informed – it’s their job.