Companies that renew their real estate
lease agreements often pay a premium
for the convenience of not relocating.
After all, lease renewals are not conducted
on an entirely level playing field; the landlord is in the business of real estate and the
tenant is not. With a well-thought-out strategy in place, however, it is possible for tenants to negotiate a discount.
“The tenant that understands lease expiration and relocation can capture savings,
which otherwise would be a major windfall
for the landlord,” explains Scott Yards, senior associate, office properties for CB
Richard Ellis.
Smart Business spoke with Yards about
the office lease renewal process, common
mistakes that companies make and how to
go about getting an optimal lease renewal.
How does the office lease renewal process
typically work?
Before the process begins, the first reality that the tenant must accept is that
achieving maximum value from a lease
renewal is not necessarily quicker or easier
than finding, negotiating and moving into a
new space. The methodology for companies to strategically work through the lease
renewal process can be divided into three
phases: phase one is situational analysis,
phase two is option development, and
phase three is project implementation.
The first phase is for the tenant and its-broker to collectively discuss and understand the tenant’s current and future corporate goals, as well as existing and pending
real estate requirements. Secondly, in the
option development phase, the tenant must
develop building/site alternatives and make
the landlord aware they are pursuing them.
An aggressive search by a credible real
estate professional from outside the company hierarchy is strong evidence that the
threat to move is real. In the final phase,
project implementation, the objective is to
bind both parties to the agreed-upon transaction and to arrange and manage all work
necessary for the tenant’s space.
What are some common mistakes that companies make during the process?
Tenants think that because there is no
operational need to relocate, the lease
renewal is essentially just a straightforward administrative matter. Relieved not
to have to address all the operational, logistical and cost issues associated with moving, tenants typically feel they come out
ahead. More often than not, however tenants should be getting a discount that
reflects the savings the landlord realizes
from their decision to stay.
Another mistake that tenants make is
entering the renewal process without a
clear strategy. Tenants sometimes do not
see the renewal as an opportunity to gain a
competitive cost advantage, and subsequently do not commit adequate resources
to the transaction. Finally, tenants often fail
to understand the economics of the renewal situation from the landlord’s perspective.
What specific strategies should be utilized to
get an optimal lease renewal?
Time: Landlords know how much time it
takes companies to make decisions and
how such decisions can be readily delayed.
The window must open early enough to
convince the landlord that there is time
enough to make both the decision and the
move. For projects of significance, the process should begin at least two years
prior to lease expiration and for very large
projects where build-to-suits may be an
option, even more time is required.
Objectives: Tenants need to clearly
define their objectives to convey a focused
approach on the landlord’s income stream.
Understanding of landlord: Tenants
need to understand the landlord’s position
and objectives. Landlords vary by types of
investments, portfolios, and financial and
risk profiles. An entrepreneurial developer
has different objectives than institutional
owners.
Credible motivation: The landlord
must be convinced that the tenant can find
an alternative that meets and exceeds its
objective(s).
Credible market search: The landlord
needs to be aware of the tenant’s alternatives. An aggressive market search by a
leading real estate firm from outside the
company is proof the threat to move is real.
How much value can be extracted during the
renewal?
It depends on the market, the landlord
and the team on the tenant’s side. Tenants
who negotiate their own renewals seldom
fail entirely. They usually gain some concessions, although they may have little idea
what they are worth or what they have
received. The landlord will give up only
enough to make the tenant happy.
How can a company benefit from engaging a
real estate professional to help out with the
renewal process?
The importance of strong outside support
to plan and execute a renewal strategy cannot be overstated. A real estate professional
will have sophisticated knowledge of the
market, will be well-versed with the current
economics of leases in and around the subject building, and will be familiar with landlord tactics and vulnerabilities.
SCOTT YARDS is senior associate, office properties
for CB Richard Ellis. Reach him at (513) 369-1313 or
[email protected].