Brokering a deal Featured

8:00pm EDT May 26, 2008

Thinking of renewing your lease? Then think again before calling your landlord, and contemplate retaining a broker instead, advises Dave Kelpe, CCIM, SIOR, vice president, and Art Kerckhoff, second vice president, both of Colliers Turley Martin Tucker.

“Oftentimes, tenants will renew without representation because they think it is easier and less time-consuming to do it on their own and, in doing so, may not consider the financial implications this strategy can cause,” says Kelpe. “A broker brings a lot of market knowledge, expertise and time savings, which translates into a more advantageous lease.”

A broker also acts as an intermediary, allowing the tenant-landlord relationship to remain intact.

The downside of serving as your own negotiator can include paying above market base rent, being exposed to operating expense increases that may exceed those of your counterparts in the building and limiting your company’s potential growth by not having the appropriate options to grow or downsize.

Smart Business spoke to Kelpe and Kerckhoff about how to best approach lease renewals.

What are clients surprised to learn about the lease renewal process?

The time it takes. To create the leverage and effectively negotiate a renewal, the typical office tenant needs 12 to 18 months; larger tenants should begin much further out. Begin the process far enough in advance so that you know the market and your landlord knows that there is sufficient time to evaluate alternative options. If you’re trying to work out a renewal two months before your lease expires, you are likely to receive less desirable terms because the landlord knows this is not adequate time to relocate.

What advice would you give a client who is considering renewing?

Our recommendation is that tenants should not initially have direct contact with their landlord. Tenants do not want to give the landlord the impression that they are staying and will not consider any other options. Even if tenants have no desire to move, leverage is created by convincing landlords that they may vacate the property. Typically, it is significantly more expensive for a landlord to replace a tenant than to retain a tenant, in addition to the lost rent.

What areas need to be addressed to serve a client’s best interests?

The answer will vary depending on the tenant and its specific needs but may involve growth options, renewal options, assignment and subletting, the operating expense exclusions, etc. You should know what to look for and read each section of the lease in detail; for example, a ‘renewal option’ written into a lease may not truly be a beneficial option at all.

What preparation should tenants do?

Review their existing leases. The renewal/relocation process is an opportune time to modify and correct items in the original lease document. These can include the rent structure, what is included in operating expenses, holdover provisions, etc. They can even include items often overlooked, such as parking provisions, etc. Be forward-thinking, that is, consider your growth needs for the year, three years and 10 years out.

Also, know the market — for example, what the rates are in nearby buildings and the competitive transactions that have recently occurred. Landlords are well educated in these matters, so if you’re not properly informed you are already at a disadvantage.

For example, the market rent for a particular building may be $22 per square foot but has an ‘asking’ rent of $26 per square foot. Tenants may think they are getting a good deal at $24 per square foot because it is well below the building’s ‘asking’ rate or may be lower than the rent they are currently paying. They do not have the market knowledge to realize that, even though they are paying below the asking rate for the building, they are still paying well above the market rent. Having that knowledge is critical in lease negotiations.

What should you look for in a broker?

Seek a specialist active in the submarket you’re in and a firm with the tools and resources to enable you to successfully renew your lease. That includes competitive transactions in the marketplace, research and experience, and someone who is experienced in similar transactions in your submarket.

DAVE KELPE, CCIM, SIOR, vice president, and ART KERCKHOFF, second vice president, are both of Colliers Turley Martin Tucker. Reach Kelpe at (314) 746-0337 or dkelpe@ctmt.com. Reach Kerckhoff at (314) 746-0393 or akerckhoff@ctmt.com.