Time to Renew Your Company Lease?
Too often, we hear of the company that was approached by their landlord to renew their corporate lease, and the company owner, CFO, or CEO simply signs the renewal and gets on with their day. Companies that operate in this manner are doing themselves and their shareholders a disservice. They are leaving thousands of dollars on the table.
As professional Tenant Reps, we follow a process that generates results for our corporate tenant clients. In our Needs Analysis discussion, we determine what the client wants to do, is willing to do, and what are their needs? Does the space need a facelift? Does the company need options for flexibility? Understanding how the corporate real estate fits into the long term needs of the company is the focus and then determining how market opportunities translates into achieving that focus is our priority.
Even if a company is 90% certain they intend to renew their lease, giving consideration to other opportunities in the market is worthwhile, particularly when a company starts the process early. Starting early can provide a company the time it needs to make a smart real estate decision. Depending on what cycle the real estate market is currently experiencing determines what type opportunities exist and what reasonable alternatives exist for the client. For example, if Landlords are offering one month free for every year of committed lease term, this is a negotiating point to bring back to one’s current landlord for further discussion.
Once the alternatives are determined, the next step is to determine what the client’s current building lease is worth. Let’s use a fictitious company scenario: ABC Company is paying a full-service rental rate of $24 per square foot per year. If ABC Company leaves, then the Landlord will be looking at a minimum of 6 months downtime to market the space, advertise it and pay additional real estate commissions, equating to more than a $12/square foot/year loss. On top of this, the Landlord will more than likely have to provide new Tenant Improvements (in commercial real estate lingo, we call that TI’s) to a new corporate tenant of $10 to $15/square foot.
If ABC Company was willing to stay in their current space, they would be saving the Landlord $5/square foot in TI’s plus $12/square foot in marketing lease time, or a total of $17/square foot. Therefore, a reasonable negotiating point here is the current tenant, ABC Company, should get a portion of that $17, maybe half (half = $8.50), in the form of 2 months’ rent plus tenant improvement dollars to spruce up their space with new carpet, new paint or new signage. For some Tenant Reps, this would be the end of it. However, we like to conduct as much research on a building and its owner as possible to generate additional leverage and negotiating power.
Finding out what types of transactions have been done previously is valuable information. Using the Boy Scouts of America motto, “Be Prepared,” this rings true in all Tenant Rep negotiations. Having an attorney run a title search on the property can determine if any loans exist on the property and that payments are current. If the current lease agreement doesn’t already have it, be certain to attain a subordinated non-disturbance and attornment agreement, which protects your interests in the event of a foreclosure.
Lastly, it’s important to advise your current landlord that you are considering alternative spaces available in the marketplace. Many times a company’s current landlord will generate an initial proposal that hardly warrants serious consideration. It is the landlord that takes your “shopping the market,” seriously, and steps up to the plate with an enticing offer that can trump all other alternatives. As we narrow the choices to the top three or four space alternatives, sometimes the current space has already been eliminated, while other times the current space proposal comes up on top as one worthy of a second look. Renewing a corporate lease requires taking the necessary steps to generate interest from the current landlord as well as alternative landlords. The best method to achieve a level playing field with one’s current landlord is to consider all existing and reasonable space alternatives.