To be sure a lease does not become a suicide pact, it is important to set up a solid exit strategy. Look at the implications of a lease, consider whether it meets your goals, know how you will end the lease, and then execute the documents.
Smart Business asked Conrad B. Andersen, senior vice president with CRESA Partners, where a company should start when developing an exit strategy. His answer was to be flexible.
How can a new lease give you flexibility for ending it? What can a firm can do to cut losses if the need arises?
Whether you own your space or lease it, it is critical that you have a plan for reducing or terminating your use of that space right from the start. That plan is your exit strategy. We recommend working with top-drawer attorneys. One I often partner with, and who provided insight for this interview, is Martin E. Steere, a partner in the Los Angeles office of Manatt, Phelps & Phillips LLP. Whoever you work with, be sure they bring the requisite expertise to the table.
What are the key lease considerations for a corporate user?
There are three primary issues that concern the corporate user: supply, demand and other features in the real estate market in which your space is located. This is called your ‘submarket.’ Second, the design and use of your space. And third, your lease obligations and your rights as a tenant.
As a lessor, where is my leverage to get out?
Understanding the real estate market may help you find some leverage to use in discussions with your landlord. Some things in business can be controlled and some cannot, such as an economic cycle.
For example, if your submarket has declining vacancies and rental rates are significantly above your lease rate, it may be easy to negotiate an early termination. Your landlord can find a new tenant who will pay more rent although you may end up paying your landlord something.
Even when market rents are higher than your contract rent, your landlord may not want to extinguish your lease, especially if you have excellent credit and have been a good tenant, or if the landlord’s property has a lender who will not consent to your leaving.
What happens if I can’t get out of my lease?
Rather than terminate your lease, try to sublease your surplus space to others. You remain responsible to your landlord for your lease. You enter into a new lease (the sublease) with a new tenant for your excess space. They pay rent to you at the market rate you pay rent to your landlord as called for in your lease. Leases generally allow subleasing, but you may need landlord approval for your subtenant’s use if it is different from your own.
Other leases, including some California leases, require you to obtain landlord approval. You may be required to share a portion of rent you receive with your landlord. You may be restricted as to what kinds of subtenants you can have. You may have to first offer the space back to your landlord creating a situation where you can terminate your lease.
What if I only want to reduce my leasehold?
When you have excess space, it is probably because the entire regional or global economy is weak. Many other tenants have a similar problem. Your submarket in this case is awash in vacant space. Vacancies rise. Rents fall. Your lease rate may be above market. In this situation, your landlord will probably do everything in his power to keep you paying rent, especially if you have strong credit and have been a good tenant.
Even in a recessionary environment, you may be able to sublease your surplus space. This is especially true if the lease, the property, its location and local zoning support alternative uses. If your space is used as a general administrative office, it could be oriented to another type of use such as medical, financial services, showrooms or even retail. This is especially true if your location has good parking, visibility, street orientation, high automobile or pedestrian traffic, or is on the ground floor.
In summary, your steps are to:
- Understand the current economic climate.
- Find leverage.
- Understand your contractual rights and obligations under the lease.
- Determine whether sublease or early termination is best, and if subleasing is possible.
- Consider alternative uses for your space that may create additional demand.
CONRAD B. ANDERSEN is senior vice president with CRESA Partners, Newport Beach. The company offers an end-to-end solution that reduces process inefficiencies and increases savings opportunities. Reach Andersen at (949) 706-6600.