Lease renewal pitfalls

Consider all your options when renewing a lease.

By John A. Tablack

How do you get the best terms on a renewal? Not the way your landlord would probably have you believe. The risks and opportunities are often greater when you’re renewing a lease than they were the first time around. Yet many tenants allow themselves to be led astray.

The pitfalls of do-it-yourself representation

One typical scenario goes something like this: Your lease is reaching the end of its term. The landlord has reason to believe you’re relatively comfortable in the space and you would probably like to stay. He or she then suggests you negotiate directly rather than involving outside consultants. “You’ll get a better deal this way,” the landlord says, “because we won’t have to pay a commission. And everything will get done faster.”

You take the bait. You have a full plate of other responsibilities in your core business. The prospect of saving time and money on a real estate matter, where you have little market knowledge, lease expertise or interest, seems to make sense. In truth, it will take you countless hours-if not weeks or months-and chances are you’ll leave more money on the table than you realize.

No matter how much you trust your landlord, it would be foolhardy to walk into negotiations without leverage and some knowledge of the market, what’s available and the rental rates for comparable space. You can spend a week and barely scratch the surface. The agents you encounter in your travels will not only be understandably biased toward the landlords they represent, they may have a further agenda: to become the listing agent for your current landlord.

Renewals similar to new leases

Renewing a lease is just as important an undertaking as finding a location in the first place. If your company was looking specifically for new space, enlightened managers would typically go through a comprehensive analysis of every aspect of the operation.

They would examine and update business, strategic and marketing plans to ensure that a prospective move would enable the firm to carry out business strategies in the most profitable fashion. Work flow, employee interaction, customer and supplier convenience would all be subject to scrutiny. At the same time, they would engage a real estate consultant to help quantify the firm’s needs and provide up-to-date market information.

The easy way out

A renewal should be pursued just as prudently, but often isn’t. Sometimes, the reason is priorities. If business is chugging along at a satisfactory pace, and managers are fully immersed in core day-to-day responsibilities, there is a strong temptation to take what seems like the most expeditious route.

Concerns about jeopardizing a comfortable relationship with the landlord can also deter a business from exploring all the necessary avenues. Yet, in today’s complex, rapidly accelerating business environment, occupancy costs are too closely related to the bottom line to approach any leasing decision with anything less than critical attention.

That means not only having a precise picture of your company’s needs and of what the market has to offer but, perhaps more important, knowing what impact your staying or leaving will have on the landlord. Every owner and building agent will acknowledge that retaining a high-quality tenant is far less costly than attracting a new one, a fact that should be reflected in your rental rate and in concessions, even in a tight market. Yet few tenants, acting on their own, take such considerations into account.

As a tenant, you should know:

• The time and expense required to market the space if you move.
• The financial burden to the landlord-and the effect on his or her relationship with the lender if the space remains unoccupied.
• The expense of credit and other background checks necessary to qualify a potential tenant.
• The cost of extensive legal services and higher commissions.
• Free rent, moving allowances and other concessions necessary to lure a new tenant.
• The cost of major remodeling to satisfy a new tenant’s needs.

Another issue few tenants think about is their own desirability; how much their presence might enhance the overall worth of the property. Every landlord looks for companies that are, among other things, financially sound and well regarded by other tenants and by the business community.

As a tenant, you should begin the renewal or relocation process as early as possible. That way, you have sufficient time to explore other opportunities. Negotiations follow a better course if both parties are aware that alternatives are available and practical.

John A. Tablack is vice president of The Victor S. Voinovich Co., a Cleveland-based commercial real estate firm that represents tenants and buyers exclusively. The Victor S. Voinovich Co. is a member of the International Tenant Representative Alliance, whose members are located in all major markets throughout North America.