Spurred by a softer real estate market, recasting leases — renegotiating them before term’s end — is becoming more common and more beneficial to tenants and landlords alike.
While recasting often saves money, it
doesn’t require any more due diligence
than you would normally have to undertake later.
“Your lease is an excellent place to
look for cost savings,” says Daniel
Canvasser, CCIM, an associate in Grubb
& Ellis Company’s Detroit office.
Adds Senior Vice President Ray
Husband, “However, before recasting a
lease, you should be satisfied with the
building because you will have to take
on additional term. Admittedly, you are
taking a chance on market fluctuations,
but I would be surprised if the market
gets any weaker.”
Smart Business spoke to Canvasser
and Husband about the opportunities
that recasting a real estate lease creates.
Is recasting a lease normally something
that occurs to corporate executives?
Husband: It may or it may not,
depending on whether they approach
real estate decisions strategically.
Typically, real estate brokers have to
approach executives and explain the
process, show them where the market is
today versus when they signed their
lease and show them the savings that
can be affected by recasting. Before the
market went soft over the past couple of
years, the early recasting or renegotiating of a lease really wasn’t an alternative.
But today, a company can save a significant amount by recasting leases that
have been in place for five to 10 years.
Canvasser: Because real estate is one
of the largest overhead costs, it’s an easy
way for companies to immediately
reduce operating costs and overhead.
Brokers can do a full lease analysis,
which involves reviewing major terms
and conditions, operating expenses and
additional costs. They can show executives how the market at that time affects
lease rates and conditions.
What are the benefits of recasting to tenants?
Husband: The first benefit is related to
economics: the ability to lower lease
costs. The second benefit is seeing if the
space is being used efficiently and if
there’s an opportunity to reduce total
square footage. When employee layoffs
are involved, a company may be stuck
with excess space.
Canvasser: A major market trend is
toward less square footage. If brokers
need to bring in an architect or a space
planner to increase space efficiency,
they will do so.
What are the benefits to landlords?
Canvasser: Because there’s so much
availability in the market, if your landlord can secure your commitment well
before the lease expires it takes away
the possibility of you shopping the market, thereby increasing the landlord’s
security with another long-term lease.
Husband: If you do start shopping the
market and the landlord loses you, he or
she will run into the same costs — in
terms of paying commissions, making
improvements, free rent, giving away
moving allowances — to refill that space.
What options can tenants receive by recasting?
Canvasser: You usually receive rent
relief immediately, beginning the day the
new lease is signed. Leases in the Detroit
area normally include annual escalations, so as the lease nears its term, payments are the highest. Immediately lowering rent by $3 or $4 a square foot can
create big savings.
Husband: You also can build in expansion options, just as you would on any
other lease you sign.
Can companies recast leases on their own?
Husband: You could, but brokers supply an understanding of the market and
what tenants can ask for. The landlord
understands that when you bring in a
broker, you’re bringing in a market
expert. The landlord understands that, if
he or she does not negotiate in good
faith, you will be out in the market looking at alternatives.
Canvasser: A broker serves as an
intermediary to keep the discussions
and negotiations on a cordial basis. The
process — the lease abstract, reconfiguring space, finding inefficiencies —
involves taking a look at space from a
different angle than most business owners would. Brokers are involved in the
transaction from the start to the finish,
working with clients hand-in-hand to
make sure everything is handled to their
satisfaction.
Husband: Brokers can build in the
most flexibility possible within the lease
document itself. So economics are not
the only consideration.
Canvasser: Most of the larger landlords prefer to deal with brokers
because they know their tenants are
serious. If the space works and the building works and you are happy, it’s an easy
way to save time and effort instead of
going out and looking for new space.
RAY HUSBAND is senior vice president in the Grubb & Ellis’s Office Group. Reach him at [email protected] or (248) 357-6561. DANIEL CANVASSER, CCIM, is an associate in Grubb & Ellis Company’s Detroit office. Reach him at (248) 350-8141 or
[email protected].