While every market has its variables, there are certain rules that all tenants should follow as they approach the process of reviewing and, possibly, renewing a lease.
“The most important thing is that time is your ally,” says Ted Garrity, senior advisor with CresaPartners. “Don’t put it off, because as you get closer to your lease expiration, your power to negotiate drops exponentially.”
Smart Business asked Garrity how to get the most out of lease renewals.
What are some issues that tenants may be facing at lease renewal?
It is an excellent time to evaluate their business and do some projections to see if they have the right amount of space and if their layout is efficient. If there have been changes to the business since signing the lease, are employees ideally situated to maximize their productivity? It’s a great time to restack the space and make sure that what they are doing works if they are staying in the existing space.
When should tenants begin to think about lease renewal?
The real function here is size and complexity; typically the bigger the tenant, the further out they need to begin. Obviously, if you’re looking at 200,000 square feet, there are not a hundred spaces in the market that are going to be able to accommodate you; in that case, you want to begin several years before renewal. Smaller tenants can wait a little bit longer, but you really want to start the process at least 12 to 18 months in advance. The shorter the time, the more leverage you are giving to your existing landlord. You cannot properly investigate the market and get space built out with three months left on your lease. If you are shopping for a car it is not a good idea to break down in front of the dealership. The later you go the more the landlord views you as a captive tenant and the more difficult it becomes to effectuate favorable terms.
How should tenants prepare?
Hopefully, you have engaged a real estate advisor who can help you evaluate your current space, how it meets your needs and what, if any, changes are needed to make it a better fit. You want to have somebody who understands your business drivers, is an advocate for you in the market and who is able to go out and create a good competitive landscape. There might be a scenario that’s compelling enough to get you to leave, even if your preference was to stay. I’ve seen it happen many times where another property is actually a better solution when you factor in all aspects. Even in a tight market, there are still opportunities for tenants.
What should a tenant negotiate with a current landlord?
The renewal is a very profitable venture for the landlords, because typically they don’t have a large build-out expense. Usually, they are painting and carpeting and maybe doing some minor restructuring of the space. This, in addition to having no down time, means that their costs are much lower than finding a replacement tenant. This is an ideal time to negotiate improvements to the base building you feel are needed (HVAC, lobby areas etc.) or to services (cleaning). In addition to looking for favorable economic terms it is also a good time to look at lease language. In short, everything should be on the table.
Often you’ve got some options pre-negotiated in your lease. In some cases, these renewal options are not necessarily great but because of market conditions or if you’ve leveraged the market you can often do better than the lease. Given the amount of leverage you have with the landlord you might be able to go back and change some of the original aspects of the lease that no longer work for your situation. If you started out as a 10,000-square-foot tenant and you’ve gone through several renewals and expansions and you’re now at 40,000 square feet, you’re going to be able to make a number of changes in your lease. It is a great time to reexamine the whole document and see what you can negotiate.
Tenants often overlook their operating expense pass-throughs and in a lease renewal you should look at resetting the base year.
Do you have advice for smaller tenants?
The process and things to look at are no different for a smaller tenant. In fact, there are always more options for smaller tenants in the outside market and thus they often have greater leverage. Should staying in the current space be the right business decision, a smaller tenant needs to be well educated on market conditions and make sure they are keeping all of their options open.
TED GARRITY is a senior advisor at CresaPartners in Philadelphia. Reach him at (610) 825-9618 or email@example.com.