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 [email protected]. Reach Kerckhoff at (314) 746-0393 or [email protected].