Real estate cycles swing the negotiatingpower back and forth between thetenants and landlords. The current economic unrest has swung the balance infavor of the tenant, which can be a boon forthe opportunistic business owner.
“All the classic symptoms of a tenant’smarketplace are beginning to unfold,” saysDaniel Rudd, a Senior Vice President in theDallas office of Grubb & Ellis Company.“Typically, in a landlord’s market, you havelower vacancies and rising rents. There isless supply of real estate on the market, theeconomy is good and there is higherdemand, which drives up rental rates.”
“As you move into a tenant’s market, yougenerally have a slowing economy withincreasing vacancies and companies thatare going bankrupt, pulling back or puttingsublease space on the market, so you haveless demand and falling rents.”
Smart Business spoke to Rudd about howbusiness owners can take advantage of themarket to improve their leasing options.
How can business owners know if they couldbenefit from renegotiating their current leaseor finding a new landlord?
Most tenants should be able to loweroccupancy costs in this business environment. This turn in the marketplace createsan opportunity for tenants, and not onlytenants who have a lease expiring in thenext 12 to 18 months, which is the typicaltime frame when a tenant would approacha renewal or relocation. However, theopportunity is still worth pursuing even if atenant has 24 to 36 months remaining ontheir lease, especially larger tenants.
If that tenant is financially stable andcreditworthy, has a long-term view towardthat particular location as being core tothe business and are willing to extendtheir lease, they have an opportunity torenegotiate and immediately lower theiroccupancy costs through the remainingtwo or three years of their lease.
The flip side of that stability coin is thegrowing number of tenants who are havingtroubles and need rental concessions topotentially save themselves from bankruptcy or going dark in a location. This can bea tougher sell to the landlord, but not impossible, depending on the situation.
In every case the landlord will wantsomething of value to give you currentconcessions. Usually this is an extension ofthe lease term. However, if you’re already onshaky financial ground, perhaps you arealready paying late or are behind on rent, itdoesn’t help the landlord to offer three moreyears of extended term for lower ratestoday if they have little confidence thatyou’re going to survive regardless. In thatsituation, be prepared to share enoughinformation regarding your finances andbusiness plan so that the landlord can getcomfortable with restructuring your lease.Also in addition to more term, giving thelandlord back some other rights youcurrently have in your lease may grease theskids to get the concessions and help youneed.
What sort of landlord concessions shouldtenants look to make part of their leases?
There are a variety of concessions anddeal points that tenants need to be awareof, but as much as anything, they need toknow who their landlord is and how thatcan affect the ultimate lease negotiated.
Can my landlord perform? Tenants aren’tthe only ones having financial issues somake sure that the concessions negotiatedare protected.
To that end, tenants should try to geta Subordination and Non-DisturbanceAgreement from the lender on any building.The SNDA ensures that the lender agrees tohonor the lease and its covenants beyondany foreclosure.
If you don’t have an SNDA, many timeswhen the lender takes back the property,they are not obligated to honor the lease.Usually, the lease document will state thatit is subordinated to the mortgage and thelender’s rights.
So if the lender takes back the buildingand in its opinion there is a bad agreementin place that creates a problem for thebuilding, they may terminate the lease.This is atypical, but it can happen.
You also want to seek protection on anycash component the landlord is obligatedto provide in the lease agreement. Anysubstantial amount of cash concessionsthat the landlord is responsible forfunding, such as allowances for tenantimprovements, moving, technology, furniture, architectural, project management,etc., you want to get those amountsescrowed on the front-end with a fiduciarycontingent on the lease.
Where can business owners turn for helpwith this process?
Certainly we can help, and don’tunderestimate the value of professionalreal estate representation. Going thisalone will not yield the same resultsand you will certainly leave money onthe table. A professional that has anunderstanding of landlords and how bestto leverage the market is key to yoursuccess.
DANIEL RUDD is a Senior Vice President in Grubb & Ellis Company’s Dallas office. Reach him at (972) 450-3204 or[email protected].
