At lease renewal, you have the opportunity to negotiate rental rates and
occupancy benefits. But if you don’t take a proactive approach and seek out
expert knowledge, you will almost always
forfeit valuable concessions.
“Landlords are well aware of their tenants’ lease expiration,” says Brian Bennett,
senior vice president with CresaPartners in
Orange County. “Generally, they prefer to
address lease renewals about six to nine
months before a lease is scheduled to
expire. They also know that when tenants
have fewer options to move, there is less
time to execute that move. Thus tenants
may forfeit leverage in the negotiations.”
Smart Business spoke with Bennett
about how tenants can maximize their
leverage and generate optimum results at
lease renewal time through strategic planning and expert assistance.
Why is timing so critical in lease renewals?
Many factors affect the outcome of a
renewal. This is not an overnight process.
Tenants need to allow approximately 18 to
24 months of planning before lease negotiations. It takes time to analyze the relationship between the real estate and the business. Tenants also need ample opportunity
to learn about and consider alternatives in
case they cannot reach a mutually agreeable extension of their lease.
In today’s environment, occupants have
experienced substantial rental increases
from their last lease negotiation five or
more years ago. Tenants may also want to
consider purchase options that could
reduce costs and lower facility expenses
and take advantage of a growing surplus of
space in the market. Another benefit of
starting the process early is that tenants
may be able to realize landlord concessions prior to their lease expiration. For
example, a new, lower rental rate or free
rent concession may begin immediately.
What should tenants try to achieve during
lease renewal?
Tenants should be informed and should
understand the motivations and desires of the landlord. Doing so will allow the tenant’s adviser to better position the tenant to
negotiate more favorable terms. The objective should be an overall below-market
effective cost. From the tenant’s perspective, the renewal should result in an economic outcome that is less costly than relocating. Renewal should also include a
lower cost to the landlord than what it
would cost to secure a new tenant. It is
important to consider current market conditions and occupancy alternatives.
Landlords are fully aware that there are
inherent costs to them if their tenants
choose to relocate. These costs include:
- Lost rent from unoccupied space
- Tenant improvement costs required by
a new tenant - Additional economic incentives and/or
concessions required to secure a new
tenant
A tenant should always consider current
market trends and market concessions
that could ultimately be calculated back
into reduced cost. When tenants leverage
their options, they can often achieve equal
or more incentives than a new tenant
would receive. Additionally, at the end of a
long-term lease, tenants should negotiate space improvements. Whether improvements include major renovation or minor
improvements, such as carpet replacement
and painting, the cost should come at the
landlord’s expense.
From the tenants’ perspective, the overall
goal of a successful renewal is to eliminate
as many increases in their real estate costs
as possible while securing and maintaining
the right environment necessary for efficient operation.
How can tenants avoid common pitfalls?
The biggest mistake tenants make is
negotiating from a limited information
and/or knowledge base. Circumstances
and/or market conditions that impacted a
negotiation three or five years ago are irrelevant today. Tenants should retain detailed
information on their respective markets as
well as appropriate strategic advice from
which to create maximum leverage. Even
when tenants know that relocating is not
the best solution, a well-executed plan will
create unexpected and significant concessions resulting in measurable economic
savings.
Can companies represent themselves in this
process?
Yes, of course they can. However, over
the years fewer and fewer companies
choose do so. Like the legal profession,
high-end representation is key to realizing
optimum results. It is no different in the
real estate industry. Companies with more
than 50 employees looking to realize maximum economic savings and mitigate facility-related risk should first interview and
then retain a professional adviser that they
are comfortable with and whose experience, focus and professional history aligns
specifically to the companies’ stated objectives.
BRIAN BENNETT is senior vice president with CresaPartners
LLC in Orange County. Reach him at (949) 706-6600 or
[email protected].