Lease Renewal; Are You A Captive Tenant?

Lease Renewal…Are You A Captive Tenant?

Never assume your lease will be renewed on equitable terms and conditions. Landlords are in business just like you and their goal is always to maximize profits.  Like any business it is much more profitable to retain a customer than it is to secure a new one.  With the cost of tenant improvements, legal fees space planning, permits and commissions it can easily take a landlord 12 months to recoup the investment it makes to secure a new tenant.  So how do you maximize your negotiating point as the clock ticks down on your lease?  It is imperative to give yourself sufficient time to create the proper leverage in order to create a fair renewal transaction. The consequences of not giving yourself enough time to determine if a better alternative can be negotiated in another building could leave you accepting less than desirable terms because you ran out of time or alternatives.

As a renewing tenant, your landlord will most often offer terms that do not coincide with what is being offered to new tenants. Landlords are usually willing to match the terms and conditions the competition is offering to new tenants however if you are a tenant interested in a renewal, the landlord presumes that you are not actively shopping the market. Landlords figure your main concern is to avoid the cost and disruption of a move.

Even if you are sure you want to stay at your current location, never let your landlord  believe you are a captive tenant.

Here is my proven strategy: 

Start The Process Early

Start early enough so you have time for all the normal phases of renewal negotiations with your landlord, researching the market, alternative site selection, financial negotiation, cost comparison analysis and lease negotiation. These steps are the only way you can determine if the deal your current landlord is offering is fair. Additionally you need to give yourself time to walk away from a bad deal and continue negotiations elsewhere if necessary. If you plan to renew at your current location for a lease over 20,000 square feet, you should be actively assessing your options at least 18 months before your target renewal or relocation date.  Even a 5,000 square foot tenant should start the process 12 months prior to the end of their lease.

Market Intelligence

You have no way of determining whether a landlord’s proposed renewal is a good deal or a bad deal if you don’t have proper market intelligence. You need to know what other tenants in the marketplace, including your current building are receiving. Do not assume anything better than your current lease economics is a good deal or anything worse than your current lease economics is a bad deal. Lease terms and conditions are always a function of where the market is at the time of negotiations. The goal is to negotiate the best possible below market transaction the market will bear.

Use Insider Knowledge Of Your Current Building To Your Advantage

As a current tenant, you have an advantage over other tenants that can help you obtain better lease terms. If you have been unhappy with certain aspects of the building such as the way the common area bathrooms look, elevator performance, HVAC , etc., you should be specific about these issues in negotiating your lease renewal including consequences if changes agreed too are not made within an agreed upon time period. Execute the changes agreed upon with proper language in the lease.

Annual Lease Audits

If your current lease was negotiated properly, your advisor should be able to perform detailed annual escalation audits. This is additional knowledge that can be extremely valuable to you in structuring a lease renewal.  Annual audits show you how efficiently your landlord runs the building, what the increased economics are for certain kinds of important and incidental services that you may require as well as alerting you when you have been over charged. 

Don’t Be A Captive Tenant

A positive relationship with the current landlord is often regarded by tenants as the number one reason for negotiating a renewal on their own. This only reinforces the landlord’s belief that you have no options and that you are not taking lease negotiations seriously. It’s a clear sign that you are willing to settle.  A lease renewal should be treated like any other business operation.  The management team assesses all appropriate alternatives and decides on the greatest match.  Let the landlord know that this is your approach to whatever terms they might offer. Your landlord will know this if you have hired an experienced Tenant rep to negotiate on your behalf.  This is the only way they will respect you and ultimately agree to terms and conditions more in sync with your expectations based on current market conditions.

Know The Implications To Your Landlord If You Move Out

The landlord will incur considerable costs if you relocate for more favorable terms elsewhere such as lost revenue, promotional costs, brokerage commissions, infrastructure refurbishment, demolition costs and tenant improvement costs.   These expenses can accurately be determined and should be included in the negotiation process with the landlord.  The amount a landlord will spend to attract a new tenant, and what they will spend to retain an existing tenant can be sizeable.  A shrewd Tenant Representative should be able to structure a lease with some portion of these savings utilized to further reduce your costs should you prefer renewing your current lease.

Be Willing To Relocate

Excluding having to stay in your current location for business reasons or quality of life which only you can determine, in the end, if your analysis of the market shows that a substantially lower present value occupancy cost will result from moving, this is probably the option you should consider. If projected savings are 5% or more, this is likely to be your better option.

Occupancy costs are often the second largest fixed cost for a tenant after salaries. Managing occupancy costs is a critical corporate responsibility.  Landlords must realize that lease renewals are not a certainty.  Tenants must negotiate lease renewals with an objective, market-driven process in order to achieve the best possible terms and conditions.

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