Consider these key points when negotiating the lease for a new branch or headquarters space.
In just the past few years, I have seen several credit unions reprioritize their delivery focus from branches to digital, particularly in the areas of mortgage, auto and business lending. These changes are increasing growth and profitability by substantially reducing operating cost, and the evolution is not likely to stop. This means we need to be as flexible as possible. Leasing rather than owning branches seems to make sense for all but the most stable, profitable locations.
The first lease acquisition step is to determine a location and size based on your strategic business and marketing plan and projected shifts in delivery priorities over the next five to 10 years. Then select a real estate agent that is going to help you find the right site rather than just the most available location. Your work together will result in selecting a site, sending a letter of intent with your initial offer and completing the lease. Below is a list of key points to consider as you negotiate the lease:
- Is the space calculation based on BOMA measurements to ensure you are paying for the right square footage?
- Is remodeling of the space and the entry governed by CC&Rs (conditions, covenants and restrictions) that may limit your ability to deliver the desired functional and brand experience?
- Have all systems been evaluated and projected to function through the end of the lease? If not, does the landlord provide a guarantee?
- You will be paying for common area maintenance. Is the calculation for your prorated share accurate?
- You will likely see yearly increases in rent. Capital improvements, broker fees, marketing, legal fees or anything else that does not benefit you directly should not be included in your rent increase, and there should be a cap on such factors as inflation that drive fee escalations. The landlord should pay for any improvements required by local jurisdictions.
- If there is damage to your space, what are the requirements for landlord repair and at what percentage of damage can you terminate the lease?
- There should be no clause allowing the owner to relocate you within the complex.
- Be certain the word “days” in the lease refers to business days.
- Can you place an ATM on the outside of your building? Many complexes with a large bank tenant have restrictions on ATMs.
- You will need to provide your own insurance. The landlord will require that you are liable for your staff. Make sure you have full coverage. You will need it as soon as you sign the lease so it protects you during renovation work.
- What is your position on the complex’s marquee? Can it be improved?
- Can you get dedicated short-term parking stalls in front of your entry?
- Who is providing maintenance and cleaning?
- If you want to make modifications to your space, must you use the landlord’s contractor? Is the landlord charging you a management fee? They shouldn’t.
- If you decide to put the cost of renovation into the lease payment rather than pay directly to the contractor, how much is the landlord charging to carrying this cost? The landlord’s fee is often three to four times the actual price.
- Can you get first right of refusal on adjacent space?
- Can you sublet all or part of the space to others? This is particularly important if you need to exit the location in the future.
- If the landlord makes changes that reduce your ability to conduct business, such as limiting parking, major construction activities or adding elements that limit visibility, can you terminate the lease?
- Can you get a five-year lease with two five-year options rather than a ten-year lease? This provides added flexibility.
- Try to remove the subordination clause from the agreement. At the minimum, ensure you are not required to subordinate your leasehold interest to the lien of any mortgage holder unless they agree to terminate at foreclosure.
- What are the restrictions on signage placement in the front of your building? Is there a percentage requirement for visibility? Could this limit your ability to install an ATM?
- Is there a dedicated electric meter for you space, or are you paying a prorated share? You should have your own meter.
- The initially stated lease rate is often 10 to 15 percent more than the property owner expects to receive. Have you been able to negotiate this down?
- Understanding realistic timing is important. How long will it take the board to decide on the location and lease? How long will the renovation process take? Is there flexibility in the lease to accommodate changes to the schedule without penalty? Will we need to relocate safe deposit boxes and provide 90-day notification to members?
Getting the right location and size for your HQ or branch space is essential for driving a good return on investment. A well-negotiated lease helps ensure a solid operating environment. With a savvy strategic plan, engaged real estate agent, strong branching team, experienced design consultant and sufficient time you will reduce cost and enhance your bottom line.
Paul Seibert, CMC, is an independent facilities and real estate consultant under Paul Seibert Consulting, Seattle.