At lease renewal, you have the opportunity to negotiate rental rates and occupancy benefits. But if you don’t take a proactive approach and seek out expert knowledge, you will almost always forfeit valuable concessions.
“Landlords are well aware of their tenants’ lease expiration,” says Brian Bennett, senior vice president with CresaPartners in Orange County. “Generally, they prefer to address lease renewals about six to nine months before a lease is scheduled to expire. They also know that when tenants have fewer options to move, there is less time to execute that move. Thus tenants may forfeit leverage in the negotiations.”
Smart Business spoke with Bennett about how tenants can maximize their leverage and generate optimum results at lease renewal time through strategic planning and expert assistance.
Why is timing so critical in lease renewals?
Many factors affect the outcome of a renewal. This is not an overnight process. Tenants need to allow approximately 18 to 24 months of planning before lease negotiations. It takes time to analyze the relationship between the real estate and the business. Tenants also need ample opportunity to learn about and consider alternatives in case they cannot reach a mutually agreeable extension of their lease.
In today’s environment, occupants have experienced substantial rental increases from their last lease negotiation five or more years ago. Tenants may also want to consider purchase options that could reduce costs and lower facility expenses and take advantage of a growing surplus of space in the market. Another benefit of starting the process early is that tenants may be able to realize landlord concessions prior to their lease expiration. For example, a new, lower rental rate or free rent concession may begin immediately.
What should tenants try to achieve during lease renewal?
Tenants should be informed and should understand the motivations and desires of the landlord. Doing so will allow the tenant’s adviser to better position the tenant to negotiate more favorable terms. The objective should be an overall below-market effective cost. From the tenant’s perspective, the renewal should result in an economic outcome that is less costly than relocating. Renewal should also include a lower cost to the landlord than what it would cost to secure a new tenant. It is important to consider current market conditions and occupancy alternatives. Landlords are fully aware that there are inherent costs to them if their tenants choose to relocate. These costs include:
- Lost rent from unoccupied space
- Tenant improvement costs required by a new tenant
- Additional economic incentives and/or concessions required to secure a new tenant
A tenant should always consider current market trends and market concessions that could ultimately be calculated back into reduced cost. When tenants leverage their options, they can often achieve equal or more incentives than a new tenant would receive. Additionally, at the end of a long-term lease, tenants should negotiate space improvements. Whether improvements include major renovation or minor improvements, such as carpet replacement and painting, the cost should come at the landlord’s expense.
From the tenants’ perspective, the overall goal of a successful renewal is to eliminate as many increases in their real estate costs as possible while securing and maintaining the right environment necessary for efficient operation.
How can tenants avoid common pitfalls?
The biggest mistake tenants make is negotiating from a limited information and/or knowledge base. Circumstances and/or market conditions that impacted a negotiation three or five years ago are irrelevant today. Tenants should retain detailed information on their respective markets as well as appropriate strategic advice from which to create maximum leverage. Even when tenants know that relocating is not the best solution, a well-executed plan will create unexpected and significant concessions resulting in measurable economic savings.
Can companies represent themselves in this process?
Yes, of course they can. However, over the years fewer and fewer companies choose do so. Like the legal profession, high-end representation is key to realizing optimum results. It is no different in the real estate industry. Companies with more than 50 employees looking to realize maximum economic savings and mitigate facility-related risk should first interview and then retain a professional adviser that they are comfortable with and whose experience, focus and professional history aligns specifically to the companies’ stated objectives.
BRIAN BENNETT is senior vice president with CresaPartners LLC in Orange County. Reach him at (949) 706-6600 or firstname.lastname@example.org.