In our last Bulletin we discussed how landlords typically view lease renewal transactions, and how this perception can work against you, as a commercial tenant.
Achieving the best economics in your lease renewal requires work; however, the results are often worth the effort in terms of cost savings, attaining additional tenant finish (paint, carpet, adding or removing offices, etc) and more favorable lease terms.
How can a Tenant wishing to renew its office lease achieve an economic package comparable to that offered to a new Tenant? Simply put: you must educate yourself regarding the commercial office market and use this knowledge to create a competitive environment in which your Landlord must compete aggressively to keep you as a Tenant.
Below are 10 key steps to achieving your desired results:
1. Create a Space Program to determine how much space you need. Do you need to grow or to contract? Think not just about today but how much space you may need in three to five years.
2. Review your situation – what are your strengths and weaknesses as a Tenant in negotiations with any Landlord? Are you a strong credit tenant with a good rent payment history? Are you a relatively young company? Think carefully about how you will be perceived as a potential tenant by other Landlords. Use your strengths as you discuss a potential lease renewal with your Landlord.
3. What changes do you want or need to your existing space in terms of tenant finish? Does your space need new paint and carpeting to bring it back to a nice condition? Are there other tenant finish issues that should be addressed – such as replacing a problematic dishwasher or building out a few private offices? New Tenants are routinely offered significant Tenant Finish Allowances – don’t give away this valuable Landlord concession.
4. Are there issues in the Lease document to address? Can a personal guarantee of the lease be removed or the Security Deposit requirement waived? Can you achieve more flexible expansion and lease renewal terms? Can you achieve more parking or even free parking?
5. Survey the market, both your existing sub-market and alternative, potential relocation sub-markets. Find out as much as you can about rates, terms, tenant finish allowances and free rent offered in the market to new tenants.
6. Develop a list of potential relocation options and tour the best buildings. Because Brokers talk to each other, make yourself visible in the market – your Landlord will find out you are serious about relocating.
7. Issue a detailed written Request for Proposal (“RFP”) to your existing Landlord – control the process and tell the Landlord what you want in terms of lease term, tenant improvements, lease termination, expansion and renewal rights. Make him come back to you with a written renewal offer – this becomes the first offer – but you will want to do better later on in the process.
8. Issue similar written RFPs to the short-list of the best relocation options. Receive back the written responses and create a financial spreadsheet comparing and contrasting all the offers – not just in year one but over the full five-year+ lease term.
9. Now, it’s decision time. You may have developed an attractive relocation option that has better functionality, image and/or economics than your current location. If so, issue a written, detailed, but non-binding Letter of Intent (“LOI”). Use the LOI as a negotiating tool to drive an even better deal.
10. If renewal is still the preferred option, use a written LOI to negotiate with your Landlord. If you achieve your desired economics, you can choose to stay. But use the threat of relocation to focus the Landlord’s attention and to drive the negotiation. If you don’t achieve the terms you need, you can in fact choose to relocate.
What your Efforts can Achieve
At the end of the process, if you have used these tools effectively, you will have achieved a highly competitive renewal package that includes a competitive lease rate and/or adequate tenant finish allowance to deal with any requirements (new carpet, paint, etc.), as well as resolving issues specific to your lease (such as removal of a personal guarantee on the lease, better expansion rights, etc.).
Obviously, doing all of the above takes time. To adequately prepare for a successful lease renewal or relocation transaction, office tenants should start thinking about the process 12 – 18 months in advance, with larger tenants starting the process even earlier.
Guidance Corporate Realty Advisors routinely assists commercial office tenants with lease renewal negotiations using all the above strategies and more. We create on our clients’ behalf a highly competitive environment that delivers measurable results. And the best part is, in almost all cases, our fees are paid 100% by the Landlord. We are here to answer any commercial leasing or purchase questions.
Guidance Corporate Realty Advisors
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The Guidance Advantage
Guidance Corporate Realty Advisors provides Corporate Tenant / Buyer Representation services to corporate real estate users in the Denver metropolitan area including Boulder, Colorado. Guidance also provides these services in all major U. S. markets, as well as markets in Canada, Asia, South and Central America, and Europe. To contact: (303) 442-5400 ext 2; Email for Information; 521 Valley View Drive, Boulder, CO 80304; 5231 Monroe Street, Suite 200, Denver, CO 80216.