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 protected].
