Leveraging negotiations Featured

8:00pm EDT May 26, 2008

Negotiating a competitive real estate lease renewal or restructuring of any kind requires strategic planning and that you understand the market conditions that will impact the building owners’ decisions. Timing and knowledge are the critical factors.

“Moving your place of business is always an option, though renewing or extending a lease can be the best value for you and the landlord,” says Cameron Tapley, senior vice president and member of the Tenant Advisory Group at Grubb & Ellis Company. “If you stay, the landlord avoids potential lost rent and costly tenant improvements typically experienced as a result of your departure. The tenant avoids the disruption and cost of a move and your broker should be able to recapture some of the landlord’s savings. Whether you’re negotiating a real estate renewal or any kind of transaction, it is important that you or your representative start your negotiations early and understand the big picture, market conditions and the impact the transaction will have on everyone involved.”

Smart Business talked to Tapley about lease renegotiations.

Are lease negotiations for renewals handled the same as new leases?

If you do a good job of negotiating the initial lease, renewals are pretty simple. You just need to establish and agree on fair market value and then document the terms of the extension. However, it is always a good idea to identify and partially negotiate a couple of viable alternatives to ensure that you can create a competitive negotiating environment.

What actions should a company normally take prior to engaging in negotiations to renew or renegotiate a lease?

Develop a strategic plan with a timeline based on the future needs of your company and get started early. Get a proposal from the landlord early — 12 to 30 months in advance of lease expiration depending upon the term — so you are able to determine if the owners are tuned into the local market conditions and if they have any internal issues that may affect their ability to offer competitive lease terms.

Your planning should also include an evaluation of the efficiency of your space. Talk with your operational department heads for help in that evaluation; this typically reduces the size of the requirement.

Can a lease really be flexible?

Yes, but if you take away control from the landlord, it will cost you. The value you represent, as a tenant, is based on the confidence that landlord has in your ability to meet your commitments and how predictable your rental stream is. The strength of your company’s financials and business will determine the level of confidence, which is more or less fixed at the time of the negotiations. The predictability aspect is dependent upon the lease terms. The more flexible the lease is for the tenant, the less predictable that rental stream is. Examples are:

  • Right to increase or decrease the size of the space

  • Right to terminate

  • Right of first refusal

  • The right to renew

  • Limiting restrictions in the assignment language

Termination options are a great bargaining chip. However, termination fees are made up of the unamortized commissions and improvement costs. With that in mind, if you are able to find a space that needs minimal improvements, you can reduce those fees.

You should also request the right to relocate within a landlord’s properties. This could allow you to increase or decrease the size of your space during the lease term.

What in a lease is negotiable?

Everything, at a price. Before entering into negotiations, I recommend that you analyze how the lease terms will affect both sides. Though a transaction may ultimately be weighted to one side or the other’s advantage as a result of market conditions, it has to make good business sense to all. The mistake that many tenants make is to focus solely on the rate rather than weigh all the economic and control aspects as a whole.

How can a company gain leverage in its negotiations?

Fear is a part of all negotiations, otherwise it is a dictate, not a negotiation. A broker’s job is to minimize the client’s fear by providing viable options and enough time to get his or her clients comfortable with their decision.

Most decision-makers feel that their decisions are rationally based rather than emotional. In many aspects they are, however, when you are in the middle of negotiations and feel exposed as a result of a poor leverage position, you are anything but rational. Just keep in mind, if both parties are willing to execute an agreement that would be considered reasonable by both parties, you should have no problem bringing your negotiations to a successful close.

CAMERON TAPLEY is senior vice president in Grubb & Ellis Company’s Dallas office. Reach him at cameron.tapley@grubb-ellis.com or (972) 450-3237.