Annapolis, Maryland represents the confluence of old and new; with a commercial real estate market that is at once bolstered by new development, and venerated with a time-honored history as one of America’s great waterfront cities. Anne Arundel County, more broadly, boasts an environment particularly suited for business growth, due both to its proximity to Washington and Baltimore, as well as its ecological resources that brighten the region with greenways and state parks. But the commercial real estate market is dynamic, and not easy to predict. Property evaluation is as much a product of enterprising new development, as much as it is a function of historic market behaviours. Therefore, when the question of lease renewal options arise, proper planning and careful consideration can be a huge boon to your business’s bottom line.
COMMON LEASE RENEWAL MISCONCEPTIONS
When negotiating a lease, the renewal option is a clause that outlines the terms extending (or renewing) the original lease agreement, providing specifications such as the timeframe and rent adjustments that may occur for the commercial real estate property. The first big misconception in real estate is that you will lose the property if you do not exercise your contractual renewal option.
While the renewal clause can be a valuable tool for guaranteeing the availability of the property over an extended term, there are a number of inducements (or perks) you may be foregoing if you follow this route. Any additional incentives which may be provided to new tenants are potentially available in the process of lease renewal. Furthermore, it is in the property owner’s best interest to incentivise its current tenant, especially if there is a reliably long credit or payment history.
The second main misconception associated with lease renewal is associated with price. This may be the most significant consideration, as the general rule of thumb is: “rent increases”. Certainly the landlord will have an estimate for annual increase, and specifically in a region with large rates of growth or development, this number may be higher than what you anticipated. Associating an annual rate increase commensurate with the length of your lease term is one big way renters can use market behaviors to predict long term property prices. But another important factor to consider in a commercial real estate agreement is the possibility of a renewal rent decrease. This may seem counter-intuitive, but these are exactly the types of incentives that may be available to renewing tenants..
PLANNING THE RENEWAL STRATEGY
In many ways, the property chosen as your home-base can be essentially important to the longevity and success of your business. Certain commercial enterprises have special requirements for layout, capacity, and trafficability, which may make one real estate option less optimal than another. For these reasons, discussing and negotiating lease renewal should be done well in advance, and should be part of overall corporate planning. Whether you are a current renter or looking for a new property, some of the main steps to consider renewal options and apprise the real estate are as follows:
- Do your market research. Stay informed of the commercial real estate market conditions, considering both potential relocation options, as well as other comparable properties which meet your needs. This means tracking down alternate rates, terms, and incentives offered to new tenants.
- Analyze your requirements. Making a layout of your ideal space may be one of the most important steps. Do you plan on growing in the near term? Or will you be taking your business in a new direction. Thinking into the future will help you capitalize the most on your commercial real estate investment.
- Will the space need modification. If you are a current tenant, this would be in terms of: how much modifications have you made? In either case, the financial costs associated with previous modification or what needs to be done in the future is essentially important. This is also time to request your landlord invest in updates in your space, whether it’s just a face lift in “new paint and flooring” or changes to the layout to maximize efficiency.
THE TIME FOR ACTION
If you are a current tenant and you are looking to leverage renewal as a method of picking the best commercial real estate opportunity, or if you are simply finding your ideal lease agreement, there is an important acronym to consider: “RFP” or Request for Proposal. This is typically issued from your existing landlord, and creates documentation of the terms for the lease agreement. This becomes the first offer providing you the basis to negotiate the terms of the new lease: including rate, term, landlord improvement allowance, rent abatement and more. While negotiating your lease agreement, it can be valuable to explore different real estate options and submit multiple counter-proposals, across different timeframes of lease periods, to help you map the ins and outs of the market.
THE PAYOFF
Ultimately, there is no standard form for commercial real estate leases, and they often are subject to negotiation between the landlord and tenant. In a burgeoning business environment such as Annapolis Maryland, this can benefit either the tenant or landlord, depending on who is the most prepared. Often it is the length of preparation which makes all the difference, as large tenants should likely begin renewal considerations more than a year in advance, and plan 5-10 years down the line. With careful planning, the tenant is insulated from the dangers of bigger businesses intruding on their property, or steep rent increases. The rewards will likely constitute a competitive renewal package that features a fair lease rate, appropriate incentives, and overall the best decision for their corporate mission.
