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Posted by David Klein, Esq., SIOR, LEED AP on Monday, September 19, 2011

Lawyer's Role in Clients’ Commercial Lease Renewals Critical During Economic Volatility

Today’s market volatility is affecting business’ bottom lines, and most are not looking at real estate expenditures as a way to save money. David Klein, Esq., SIOR, LEED AP is a forensic real estate consultant with Opine Experts, and he offers the following suggestions to lawyers to better influence and manage real estate expenses and lease renewals.

Attorneys need to play an aggressive role in assisting their clients to negotiate commercial lease renewals that are more favorable to clients’ businesses. Klein recommends:

• Negotiate before the lease comes up for renewal. If a client’s commercial lease includes a renewal option, add a tickler to the calendar as a reminder to look at the office market well in advance of a lease renewal deadline.

• Reframe the renewal as a lease extension with an entirely new rental rate. This is especially important if a renewal option provides a floor rental rate higher than market, but this gambit usually saves money one way or the other.

o This stratagem usually works even when a commercial tenant has an option to renew their lease at "market rent." o Most landlords prefer to keep a good tenant in place rather than incur downtime of lost rental income, costly tenant improvement expenditures or unnecessary leasing commissions to replace a tenant. o Even in San Francisco’s relatively healthy office market, it takes more than a year to re-rent the average office space. A prudent landlord is well-advised to accept a nominally lower rent than face the risk of vacancy.

• Advise your clients to retain a commercial real estate broker qualified in the market and product type within your client’s vicinity. The real estate broker needs to assess the market.

o Inquire of the landlord what the rent is if the option is exercised. Most landlords will gladly provide this information if asked. o The commercial real estate broker should then survey the peer group of buildings in the submarket similar in type and age to the client’s building and determine whether the peer-group buildings have space available similar to existing space. o The broker should generate a written report of the rents and terms that could be achieved in the peer buildings if the client were to move there.

• Neighboring landlords with vacant space are more likely to quote rent below what the current landlord is quoting to renew the commercial lease.

• Ask the commercial real estate broker to learn what they can about other tenants’ plans to remain in their same space, compete for a client’s space, or move out. This information is helpful at the negotiating table with the landlord; if the building faces an increase in vacancy of 10 percent, a landlord may be more interested in negotiating a less expensive extension.

• Using documentary evidence and information gleaned during due diligence, return to your client’s landlord and suggest leasing terms quoted by peer buildings. The incumbent landlord should be amenable to reducing previously quoted rates to maintain your client as a paying tenant.

David Klein, Esq., SIOR, LEED AP is a forensic real estate consultant with Opine Experts. He is a California real estate broker and attorney with 25 years experience in commercial real estate.

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