Negotiating a competitive real estate
lease renewal or restructuring of any
kind requires strategic planning and that you understand the market conditions
that will impact the building owners’ decisions. Timing and knowledge are the critical factors.
“Moving your place of business is always
an option, though renewing or extending a
lease can be the best value for you and the
landlord,” says Cameron Tapley, senior
vice president and member of the Tenant
Advisory Group at Grubb & Ellis Company.
“If you stay, the landlord avoids potential
lost rent and costly tenant improvements
typically experienced as a result of your
departure. The tenant avoids the disruption and cost of a move and your broker
should be able to recapture some of the
landlord’s savings. Whether you’re negotiating a real estate renewal or any kind of
transaction, it is important that you or your
representative start your negotiations early
and understand the big picture, market
conditions and the impact the transaction
will have on everyone involved.”
Smart Business talked to Tapley about
lease renegotiations.
Are lease negotiations for renewals handled
the same as new leases?
If you do a good job of negotiating the initial lease, renewals are pretty simple. You
just need to establish and agree on fair
market value and then document the terms
of the extension. However, it is always a
good idea to identify and partially negotiate
a couple of viable alternatives to ensure
that you can create a competitive negotiating environment.
What actions should a company normally
take prior to engaging in negotiations to
renew or renegotiate a lease?
Develop a strategic plan with a timeline
based on the future needs of your company and get started early. Get a proposal
from the landlord early — 12 to 30 months
in advance of lease expiration depending
upon the term — so you are able to determine if the owners are tuned into the local
market conditions and if they have any internal issues that may affect their ability
to offer competitive lease terms.
Your planning should also include an
evaluation of the efficiency of your space.
Talk with your operational department
heads for help in that evaluation; this typically reduces the size of the requirement.
Can a lease really be flexible?
Yes, but if you take away control from the
landlord, it will cost you. The value you
represent, as a tenant, is based on the confidence that landlord has in your ability to
meet your commitments and how predictable your rental stream is. The strength
of your company’s financials and business
will determine the level of confidence,
which is more or less fixed at the time of
the negotiations. The predictability aspect
is dependent upon the lease terms. The
more flexible the lease is for the tenant, the
less predictable that rental stream is.
Examples are:
- Right to increase or decrease the size
of the space - Right to terminate
- Right of first refusal
- The right to renew
- Limiting restrictions in the assignment
language
Termination options are a great bargaining chip. However, termination fees are
made up of the unamortized commissions
and improvement costs. With that in mind,
if you are able to find a space that needs
minimal improvements, you can reduce
those fees.
You should also request the right to relocate within a landlord’s properties. This
could allow you to increase or decrease the
size of your space during the lease term.
What in a lease is negotiable?
Everything, at a price. Before entering
into negotiations, I recommend that you
analyze how the lease terms will affect
both sides. Though a transaction may ultimately be weighted to one side or the
other’s advantage as a result of market conditions, it has to make good business sense
to all. The mistake that many tenants make
is to focus solely on the rate rather than
weigh all the economic and control aspects
as a whole.
How can a company gain leverage in its
negotiations?
Fear is a part of all negotiations, otherwise it is a dictate, not a negotiation. A broker’s job is to minimize the client’s fear by
providing viable options and enough time
to get his or her clients comfortable with
their decision.
Most decision-makers feel that their decisions are rationally based rather than emotional. In many aspects they are, however,
when you are in the middle of negotiations
and feel exposed as a result of a poor leverage position, you are anything but rational.
Just keep in mind, if both parties are willing to execute an agreement that would be
considered reasonable by both parties, you
should have no problem bringing your
negotiations to a successful close.
CAMERON TAPLEY is senior vice president in Grubb & Ellis Company’s Dallas office. Reach him at [email protected]
or (972) 450-3237.