When Should I Start Looking for Space?

Q: How early is too early to start thinking about new space or negotiating a renewal?

A: It almost never is, with some qualifiers

For a more precise answer, a general rule of thumb that I like to use if you have a relatively straight-forward need is to start at least six months before your current lease expiration, and preferably about 12-18 months, depending on the situation.

The Case for More Time
If you are considering a purchase, development of a new building, or have complex and specific needs (ex: rail access, 100,000+ SF, the need for a 'main and main' location in an extremely competitive market, etc), then 12-18 months is probably the minimum and might still not be enough.

The Case for Less Time
If you have a smaller (1,000-10,000 SF) need that is relatively simple and you are willing to be flexible on things to allow moving into previously built-out space, you may be able to complete the process in as little as about 3 months. That being said, it will take a commitment to moving everything as quickly as possible.

Just remember that, as the tenant, time is on the landlord's side and as you get closer to the expiration of your current lease, you will lose leverage.

Is a Termination Option the Solution?

Many companies are torn between wanting the lease incentives that landlords offer for long term leases and also wanting the flexibility for their company to grow, shrink or move in a shorter time period.

Sometimes it might appear like its an either/or choice:

1. Take a long-term deal and get a large tenant improvement allowance, free rent, space planning allowance, lower rent rate, etc, OR
2. Sign a short term deal so you have flexibility but don't get any incentives

However, a Termination Option might be a workable solution that both you and the landlord can agree to.

How It Works
1. You sign a long-term lease (ie, 5, 7, 10, 12, 15+ years) and the landlord provides corresponding concessions
2. You negotiate a termination option to terminate the lease at a specific date or within a specific range of dates (ie, between the 3rd and 5th year)
3. If you decide to terminate, you provide notice to the landlord at a specified point along with a termination fee


How are Termination Fees Usually Calculated?
All transactions are negotiated on their own merits. Termination fees are often set up as a tenant paying the 'unamortized transaction costs amortized at x% rate' at the time of termination. Transaction costs are typically defined as the tenant improvement allowance, free rent, brokerage fees, legal fees, and any other costs that the landlord incurred to have you as a tenant.


A Hypothetical Example
Say there is a 10-year lease, with $200,000 in Tenant Improvements, 3 months of free net rent (equal to $24,000), and $60,000 in brokerage and legal fees to have the deal signed. Then the total transaction costs would be ($200k + $24K + $60K) $284,000.

Amortizing this over 10 years (the same as a mortgage, car loan, or any other loan) and assuming that the rate agreed to in the lease document was 7%, this comes out to a monthly "payment" of $3,278.36 which is what is being paid through your Net rent rate. If the tenant has a Termination Option at the end of the seventh year, the 'unamortized balance' at that point would be $106,174.39 (or about 6.5 months Gross rent at that point).

Although this wouldn't be free, it would still be better to have this choice than to need to continue to pay rent at that space for the next 36 months through the end of the natural term of the lease.