If Relocating Your Business is the Last Thing You Want To Do…
If you love your location…
…and your office lease expiration is approaching, the good news is, the lease renewal process will be quick and easy, right? Sure, if you don’t mind paying a premium. Most business owners and managers want a market deal; and unfortunately, it is not that simple to get a fair deal.
ALL aspects of a lease can be negotiated during a lease renewal
Landlords, often bet that Tenants will have this laissez-faire attitude towards renewing their lease. Expecting the renewal to be easy, Tenants want to be treated better or equal to a new tenant with respect to free rent, tenant improvement allowance and the operating expense stop. In addition to negotiating the terms above, most tenants don’t think about the opportunity to re-negotiate any unfavorable terms in the existing lease, a fact that landlords will not share. Additionally, because Tenants believe the renewal process to be simple, they often become a “Captive Tenant”.
Are You Being Held Captive?
In the world of real estate, a Captive Tenant is “captive” to the space in which they are currently occupying. They have no relocation options unless they are willing to holdover or send their people home. Captive Tenants are generally categorized into two distinct types. The first, are Tenants that have highly specialized locational, equipment or zoning needs. Unfortunately, when Tenants have specialized needs there are fewer ways to create leverage. This most often occurs with an industrial/manufacturing user. However, most Captive Tenants fall into the second category. They just waited too long to begin the renegotiation process and the Landlord knows that the Tenant does not realistically have time to adequately address each step in a relocation. Therefore, in order to avoid business interruption, the Tenant has no other option but to sign a less-than-optimal renewal.
While this may sound intimidating, the tenant does have leverage if given enough time. As a rule, it is more expensive for Landlords to meet the demands of a new Tenant because the tenant is comparing other alternatives forcing the landlord to compete and likely spend more money. A legal review for an amendment is much less expensive for the landlord than a new lease! The Landlord will also save on Architectural fees , Tenant Improvements, and no loss of income to the landlord due to construction time.
Time to Be Strategic
So, what does an actual lease renewal process look like? If you read last month’s newsletter, (if you didn’t click here!) the Renewal Process has more similarities to the Relocation Process than it does differences.
To avoid becoming a Captive Tenant the renewal process should begin at least 9-12 months in advance of a lease expiration. If the goal is not to move, it is important to locate and analyze acceptable alternatives to the Tenant’s current location creating the leverage needed to strike the best deal. Beginning this process, Cherry Associates will utilize the Strategic Location Process shown below.
Where Does the Tenant Get Leverage?
While similar, there are a few key differences in the phases of the Strategic Location Process between a Lease Renewal and a New Lease. Many of the phases will be abbreviated. For example, the Preliminary Analysis phase will be shorter since you have already planned space that suits your needs. Unless your business has grown considerably, it may not be necessary to involve a space planner in the Preliminary Analysis.
The next step, the Office Market Analysis will not vary much from the Relocation Process. It is still necessary to visit at least a few different locations so that the Landlord knows we are in the market and are willing to relocate, giving the Tenant leverage.
Next, the alternatives must be evaluated, and here Cherry Associates can be of great help. We can guide you through this analysis and extrapolate negotiation points that could then be used when renegotiating an active lease that is approaching expiration. For example, if one of the alternative buildings is offering a lower rate, 6 months of Free Rent and Tenant Improvement (TI) dollars, the argument could be made that relocation costs would be more than covered by the 6 months of Free Rent and you would have a lower rental rate in more updated space. How then, can your current Landlord compete with that? At which point, your current Landlord may be willing to negotiate further on the rate as well as other concessions like Free Rent and additional tenant improvements.
After the negotiations are complete Post-Lease Requirements will likely include oversite for spending rehab dollars and monitoring operating expenses annually.
Ultimately, the lease renewal process, though not simple or quick, is very important as your office is the second largest expense, after your people. Having a trusted advisor on your side can greatly simplify the process, leaving you free to tend your actual business. Cherry Associates understands the real estate market, and we have the experience to guide you through this stressful process. Additionally, once your Lease Amendment (or New Lease) is signed we will remain involved by abstracting and administering your lease. This will give you peace of mind, knowing you have another set of eyes on important dates – we can remind you of approaching deadlines and renewals to prevent you from finding yourself in a Captive Tenant situation in the future!
