Lease renewals are not always conducted
on a level playing field. After all, the landlord is in the real estate business and the
tenant is not. By planning in advance and
having professional assistance, tenants can
increase the probability of negotiating a discount when renewing.
“Companies should plan ahead to allow
ample time to complete a renewal,” says Rick
Messey, CCIM, vice president, Colliers Turley
Martin Tucker. “Companies that fail to do this
lose considerable leverage as landlords see
the tenants’ options dwindle.”
Smart Business spoke with Messey about
the lease renewal process, the importance of
starting early and what qualities to look for in
a real estate broker.
How does the lease renewal process work?
An important clause found in most leases is
the renewal option, which allows tenants to
extend their leases for a predetermined
amount of time (usually three or five years)
by giving their landlords six to 12 months
written notice. Renewal options specify
rental rates, concessions, tenant improvements and whether a new base year for operating expenses will be granted. These options
are sometimes fixed amounts or subject to
the fair market value conditions.
What are some common mistakes that companies make during the process?
One of the most common mistakes companies make is negotiating without the help of
a commercial real estate professional.
Companies believe they can save money by
not using a broker, but to benefit in real
estate, you need leverage. Landlords are in
the real estate business and negotiate with
professional guidance, so why not level the
playing field? Savings received from using a
broker exceed the cost of commissions.
Another mistake companies make when
entering into a lease renegotiation is being
unfamiliar with their current lease terms.
Prior to contacting their landlord about
renewing, every company should be well
aware of every option and deadline within
their lease. As mentioned, most leases contain options that must be exercised within a
specific time period, typically nine to 12
months prior to their lease expiration. If, a tenant allows said time period to pass, they
risk losing all rights outlined in the option.
What type of cost savings can be extracted
during the renewal?
Tenants in a bear market can receive significant cost savings. As the economy weakens,
companies continue to lay off and downsize
their work forces. Landlords will be feeling
the pinch and will offer aggressive concessions and more attractive lease terms to lure
new tenants or maintain current ones. Now
more than ever, a qualified commercial real
estate broker can assist companies in reducing overall occupancy costs and improving
profitability. The savings will depend on the
availability of competitive vacancies, the efficiencies of the buildings, the market knowledge of the broker and the broker’s ability to
negotiate business points and reduce overall
exposure. Some of these risks are often
found in the operating expense and expansion/contraction options in the lease.
When should a company start the process?
As a rule of thumb, the larger the tenant, the
greater amount of time needed to finalize and
leverage a renewal transaction. Larger tenants should consider their options several years in advance so that all viable existing
and new properties may be considered. New
developments or speculative properties
often attract larger tenants. These new developments could receive financial incentives,
like tax abatements, or federal and state
incentives that could be passed along to the
tenants. In addition, newer buildings often
provide larger tenants more efficient floor
plates and advanced mechanical systems
that use less energy than their older counterparts. These occupancy savings can all be
quantified and compared to the existing
renewals on an apples-to-apples basis.
Smaller tenants should consider the renewal process 12 to 18 months in advance of their
lease expiration, regardless of what their
renewal option dictates. This is recommended so that the tenant can consider and compare all relocation options in the market.
Secondly, tenants should begin negotiating
any relocation options before their lease
options expire. Tenants who miss their lease
options incur more risk, as landlords often
treat them differently. Landlords view this as
an opportunity to push rents higher as the
window of opportunity to relocate closes. If
tenants holdover, they often see penalties of
150 to 200 percent of their last month’s rent
and could also incur consequential damages
if they holdover without permission.
In what ways can a company benefit from
engaging a quality real estate professional?
Real estate costs account for a significant
portion of a company’s overhead. Real estate
professionals can provide the guidance needed to minimize costs associated with occupying commercial space. A good broker will
possess the following qualities and tools: upto-date market knowledge, expertise in negotiating leases, the ability to provide a detailed
financial analysis on a comparable basis and
construction expertise. Brokers help companies achieve both short- and long-term goals
by asking the right questions. They save companies time and money by being intimately
familiar within a specialized market. This, in
turn, reduces the tenant’s overall occupancy
costs, increases profitability, mitigates lease
risks and minimizes time.
RICK MESSEY, CCIM, is the vice president of Colliers Turley Martin Tucker. Reach him at (314) 746-0318 or [email protected].
