Spurred by a softer real estate market, recasting leases renegotiating them before term’s end is becoming more common and more beneficial to tenants and landlords alike. While recasting often saves money, it doesn’t require any more due diligence than you would normally have to undertake later.
“Your lease is an excellent place to look for cost savings,” says Daniel Canvasser, CCIM, an associate in Grubb & Ellis Company’s Detroit office.
Adds Senior Vice President Ray Husband, “However, before recasting a lease, you should be satisfied with the building because you will have to take on additional term. Admittedly, you are taking a chance on market fluctuations, but I would be surprised if the market gets any weaker.”
Smart Business spoke to Canvasser and Husband about the opportunities that recasting a real estate lease creates.
Is recasting a lease normally something that occurs to corporate executives?
Husband: It may or it may not, depending on whether they approach real estate decisions strategically. Typically, real estate brokers have to approach executives and explain the process, show them where the market is today versus when they signed their lease and show them the savings that can be affected by recasting. Before the market went soft over the past couple of years, the early recasting or renegotiating of a lease really wasn’t an alternative. But today, a company can save a significant amount by recasting leases that have been in place for five to 10 years.
Canvasser: Because real estate is one of the largest overhead costs, it’s an easy way for companies to immediately reduce operating costs and overhead. Brokers can do a full lease analysis, which involves reviewing major terms and conditions, operating expenses and additional costs. They can show executives how the market at that time affects lease rates and conditions.
What are the benefits of recasting to tenants?
Husband: The first benefit is related to economics: the ability to lower lease costs. The second benefit is seeing if the space is being used efficiently and if there’s an opportunity to reduce total square footage. When employee layoffs are involved, a company may be stuck with excess space.
Canvasser: A major market trend is toward less square footage. If brokers need to bring in an architect or a space planner to increase space efficiency, they will do so.
What are the benefits to landlords?
Canvasser: Because there’s so much availability in the market, if your landlord can secure your commitment well before the lease expires it takes away the possibility of you shopping the market, thereby increasing the landlord’s security with another long-term lease.
Husband: If you do start shopping the market and the landlord loses you, he or she will run into the same costs in terms of paying commissions, making improvements, free rent, giving away moving allowances to refill that space.
What options can tenants receive by recasting?
Canvasser: You usually receive rent relief immediately, beginning the day the new lease is signed. Leases in the Detroit area normally include annual escalations, so as the lease nears its term, payments are the highest. Immediately lowering rent by $3 or $4 a square foot can create big savings.
Husband: You also can build in expansion options, just as you would on any other lease you sign.
Can companies recast leases on their own?
Husband: You could, but brokers supply an understanding of the market and what tenants can ask for. The landlord understands that when you bring in a broker, you’re bringing in a market expert. The landlord understands that, if he or she does not negotiate in good faith, you will be out in the market looking at alternatives.
Canvasser: A broker serves as an intermediary to keep the discussions and negotiations on a cordial basis. The process the lease abstract, reconfiguring space, finding inefficiencies involves taking a look at space from a different angle than most business owners would. Brokers are involved in the transaction from the start to the finish, working with clients hand-in-hand to make sure everything is handled to their satisfaction.
Husband: Brokers can build in the most flexibility possible within the lease document itself. So economics are not the only consideration.
Canvasser: Most of the larger landlords prefer to deal with brokers because they know their tenants are serious. If the space works and the building works and you are happy, it’s an easy way to save time and effort instead of going out and looking for new space.
RAY HUSBAND is senior vice president in the Grubb & Ellis’s Office Group. Reach him at email@example.com or (248) 357-6561. DANIEL CANVASSER, CCIM, is an associate in Grubb & Ellis Company’s Detroit office. Reach him at (248) 350-8141 or firstname.lastname@example.org.