Don’t Let a Lease Expiration Go to Waste
“Don’t let a crisis go to waste.” This proverb from Winston Churchill, made famous again in 2008 by Rahm Emanuel, is applicable to many things in life, including the expiration of a commercial lease.
The moral of the proverb, as Emanuel told the Wall Street Journal 7 years ago, is that a crisis presents “an opportunity to do things that you think you could not do before.” When a lease expires, a lot of decisions—often long-term decisions—are made. If we face those decisions with a vision for opportunities instead of obstacles, we can find success.
Businesses usually make decisions for the next quarter, the next year, perhaps the next 2 years. But a lease can be a 10- or even 15-year commitment. It can be an incredibly powerful tool to get a business to focus on myriad strategic issues like infrastructure or personnel because the lease expiration provides a definite point in time for a decision to be made.
A year or two in advance of a lease expiration, depending on the size of the tenant, we advise companies to make sure they have carefully thought out their strategy—that they know the direction they are heading. Very early in the process, their key executives should have a discussion group internally to determine their future plans. Some companies use, for example, a “SWOT analysis” (analyzing Strengths, Weaknesses, Opportunities, and Threats), in order to evaluate risks, identify areas to focus efforts, etc. This can be a critical time to realign the company—get rid of one division, keep another; enter a new type of business, leave another; and so on.
One purpose for the negotiation of a lease is to create flexibility, which is another word for “exit strategy.” If things don’t work out as intended, it’s important to have options. It is similar to a prenuptial agreement. An exit strategy may be controversial for a marriage, but it’s critical when it comes to business.
What if your business is not where you expected it to be in 3 years, but you’re stuck in a 10-year lease? This isn’t a pessimistic or arbitrary “what if”; approximately 90% of leases never reach completion without something major occurring—perhaps the company is sold, or perhaps it buys another company. If you have a good exit strategy in place and you plan properly, then real estate becomes seamless in your business decisions, rather than becoming a burden.
One of my clients had started a business and signed a 10-year lease. The business did very well—so well, in fact, that just a few years in, Disney bought it. However, they wanted only the intellectual property, not the physical space. It was a favorable agreement overall, but now my client was “stuck” with another 7 years on his lease.
He eventually started another company in the space. It was about this time that I met him, and I was able to help him move into a new space with much more flexibility. The new building had room available on the floor for expansion, so over the next several years, he was able to lease 3,000- to 6,000-square-foot increments. The space grew as his company grew, thanks to foresight and planning at the time the lease was signed.
Landlords have the opposite goal from their tenants; the more long-term and stable a lease, the better for the landlord. That’s where a good real estate broker can help: we understand the needs of the landlord, but we can still craft a lease that works well for the business.
Eventually, my client sold his new business to the Financial Times. The lease expired within the year the business was bought, and, as I understand it, he is sipping Martinis on his yacht in Martinique.
If you have a business or know of a business that requires thoughtful real estate counsel, call us.
George E. Grace
Mohr Partners, Inc.
232 Madison Avenue
New York, NY 10016