Tips to Create Flexibility in Lease Terms

By James A. Schnur, CCIM
President and Designated Managing Broker
Integrated Real Estate Solutions

The past year has undoubtedly created a series of unique challenges for business owners. But weathering the storm has provided an opportunity for those same challenges to act as pertinent teachable moments to help business owners strengthen their resolve, and understand how to be more agile in the face of adversity. 

One of the most prominent lessons learned would be the power inherent in the freedom to pivot when needed. Owners and employers who were tied into iron-clad leases and old business models suffered as the world locked down and employees shifted to working from home. Businesses that were prepared and could redistribute work to employees—and who were able to mitigate risk and losses through flexible lease terms—were able to approach the conditions of the pandemic with greater certainty and reduced fear of the unknown.

Of course, not every business has the ability to redistribute their work to employees at home due to a combination of industry restrictions, labor limitations, or the nature of the products and services they provide. But these same companies would benefit even more from more flexible lease terms, as it provides additional options when a primary location is unexpectedly no longer viable, or when owners find themselves paying for a larger, unoccupied amount of space that could be put to better use. While every lease is unique, working to include additional points of flexibility will prepare business owners for the unexpected and ensure a greater amount of success.

A Shorter Lease with Options on Renewal

Committing to a shorter lease term upfront, with additional options should the lease be renewed, provides owners and operators with the ability to save money by not committing as much upfront, and provides additional incentives to stay once the renewal period draws near. Landlords may withhold concessions on shorter leases, but business owners can feel more secure knowing they can pivot as necessary rather than being locked into a single property, or trying to negotiate to break a lease.

Termination Options

On the flip side, for owners that prefer the security of a long-term lease, and want to maximize on the upfront concessions, including termination options within the lease can be a valuable asset. This allows owners to still have a way out of their lease, through a buy-out fee, but at a drastically reduced cost from being beholden to a space that’s no longer a profitable option.

Subletting Strategically

This works both in terms of adding subleasing terms to a new lease or finding a space to sublease for a short term. Including terms that allow a renter to find another renter to sublease their space allows a business to avoid breaking their lease outright or paying out on a higher rent for a space. This strategy rarely nets a profit for a business, but it will offset losses for what has already been invested in a space.

Alternately, for employers unable to find a landlord willing to agree to a short-term lease, finding another business willing to sublet their space could provide a similar opportunity. This may put business owners in an advantageous position to negotiate a long-term lease for the same space when the sublease runs its course.

The Negotiation of Terms vs Tenant Buildout

If business owners are able to find a space that works for their size and budget without needing a substantial amount of improvement or renovation before being occupied, they may be able to use terms around a standard tenant improvement allowance to negotiate for more favorable lease terms. This saves the landlord money upfront and introduces better terms for a business to use the space as they need it.

When approaching the negotiation table for lease terms, it can be a difficult environment to navigate without guidance and an advocate on the side of the business. Fortunately, the tenant representative brokers at Integrated Real Estate Solutions are here to help. The commercial tenant representative brokers at Integrated Real Estate Solutions proactively look at commercial real estate opportunities and solutions that make sense on all levels for our clients. Working with business owners and employers to achieve their ideal vision, IRES guides and advocates on behalf of a business’s interests to ensure that the next relocation opportunity leads to continued business success.

Integrated Real Estate Solutions, Inc. provides clients with the in-depth knowledge and experience that is critical to determine the right path to your next move, lease renewal, or strategic re-positioning of your real estate portfolio. Contact us or call 847.550.0160 today about your needs, and put our success to work for you.

Author: Jim Schnur

Jim Schnur is the President and Designated Managing Broker of Integrated Real Estate Solutions, Inc. Jim started the firm in 2003 after almost 20 years negotiating and overseeing real estate transactions at Hewlett Packard Co. and Agilent Technologies, Inc.