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Expansion-Proofing Your Lease

[fa icon="calendar"] 9/27/18 4:00 PM / by Matt Weist

Matt Weist

As your company continues to grow, figuring out the right kind of space to support your operations is no small feat. As one of the top expenses for your business, making informed real estate decisions is imperative to the health of your bottom line and long-term success.

When you’re looking for office space, it’s important to consider not only where you are now, but also where you’ll be in 3-5 years, and even beyond that. Since most leases are 5+ years in length, the last thing you want is to outgrow your space and be stuck in a lease that doesn’t provide any viable options for expanding. Your time and energy is better spent on scaling your operations or coaching your employees to success rather than stressing out about real estate.

To ensure you’re accounting for all of your expansion needs, take the time to understand your lease options. As the Denver market remains competitive, it may be tempting to sign a lease for more space than you currently need to ensure it’s there for you in the future. While understandable, this approach does little more than overload your P&L with unneeded expenses. 

Luckily, there are multiple ways to secure expansion flexibility in your lease that you only pay for if and when you actually need it. You just need to know what to ask for. That’s where we come in. Remember that as a tenant, you always have negotiating power with your landlord.

Here are some options that can be included in your lease agreement to help protect future expansion needs:

Right of First Offer (ROFO)

If a predefined space (as specified in your lease agreement) becomes available in your building, the landlord must first present it to you before opening it up to third parties. This option can be especially beneficial if you move into a building where you know another tenant’s lease is up soon (something your tenant-rep broker should know).

Right of First Refusal (ROFR)

Any deal that a landlord is willing to sign with a third party for a predefined space must also be presented to you. If you’re interested in the space, you have the opportunity to match the third party’s offer.

Note: With ROFR and ROFO, make sure to confirm your expansion right is actually a “first right” and not subordinate to another tenant in the building that has already secured an expansion right on the same space.

Must-Take Space

This clause includes a definitive time period to exercise an expansion option on a predetermined space.

Right to Terminate

Want ultimate flexibility? This gives you the right to terminate your lease at any specific time during the lease term prior to the expiration of the lease. The termination notice must be provided to the landlord in advance of the termination, typically 6-12 months prior.

Flexible Subleasing Rights

With this option, you have the right to sublease or assign your obligation for a space to a third party for the remainder of the term of the lease. Important note: This does not relinquish the duties of the tenant to perform under the lease obligations.

While negotiating terms like these is common, buildings that are for sale typically provide more flexible options. Since the current owner wants to fill vacancies to maximize the value of their asset, tenants have an opportunity to negotiate better lease terms and concessions.

When you’re looking to grow, but unsure by how much and over what time, lean on the knowledge and expertise of a tenant-rep broker, like Column Commercial Partners. Using a tenant-rep broker doesn’t cost you anything out of pocket and adds tremendous negotiating leverage when engaging the market on your behalf.

Matt Weist | Broker Associate | 303.999.6090 | 

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Topics: Metro Denver, Commercial Real Estate, Commercial Brokerage, Denver Market, lease options, planning for expansion

Matt Weist

Written by Matt Weist

Matt Weist is a Native Coloradoan, who grew up in the foothills just west of Denver. Matt entered real estate in 2017 following his pursuit of investments and a desire to work with fellow investors and entrepreneurs. He has completed eight transactions totaling over $3.5 Million since obtaining his license, in just 10 months. One of Matt’s primary strengths is helping his clients visualize a commercial property's potential for long-term portfolio growth.

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