Many tenants assume their lease for industrial property, retail property or office property in Tucson will be renewed on reasonable terms. Thus, they leave a short amount of time to take care of the renewal. Then it turns out that the landlord’s draft proposal involves much higher costs than anticipated.
Because there isn’t enough time to determine if a better option can be negotiated elsewhere, such tenants are stuck. That’s why a lot of tenants, including Fortune 5 companies and national law firms, often end up swallowing a bad deal.
At the very least, you can bet that as a renewing tenant, your landlord will offer terms inferior to what is being offered to new tenants. After all, new tenants are in the market shopping around. To attract new tenants, the landlord must be willing to match the competition in terms of rent, free rent, utilities, work letter, building systems, communications capability, security systems, electrical capacity, lobby appearance and other factors.
But if you are a tenant interested in a renewal, the landlord presumes–and often rightly so–that you’re not shopping around much for, say, a lease for industrial property. The landlord figures you’re mainly concerned with avoiding the cost and headache of a move. He can probably keep you in the building without offering you nearly as much as he offers a new tenant.
If you assume the cost and disruption of moving are so high that your only good option is to renew your lease, it will become your only option. You will be a captive market. You could easily miss substantial benefits your landlord offers as inducements for new tenants.
Here’s a proven strategy for maximizing the value of any renewal–even if you are 100% committed to staying at your current location.
Use Time to Your Advantage
You need to start early enough so you have time for all the normal phases of site selection, financial negotiation and analysis, lease negotiation–plus time to walk away from a bad deal and continue negotiations elsewhere if need be.
This means if you plan to renew your current lease for industrial property, you should actively assess your options at least 18 months before your target move-in/renewal date.
Understand Your Options
You need to have a good idea what lease terms other tenants in the marketplace are getting. Otherwise, you have no way of figuring out if a landlord’s proposed lease renewal is a good deal or a bad one. Your landlord’s offer could easily be inferior to what tenants in your area and across the country are getting. That would qualify as a bad deal even if it might be better than your original lease.
Rent and work letter allowance are just the beginning. Every bit as important are terms buried in the fine print, terms which can undermine what you assumed to be a good deal. For instance, clauses dealing with operating expense, electricity, use and sublease all may significantly effect your finances and flexibility.
Use Your Inside Knowledge
As a long-time resident of the building where you plan to renew, you have a key advantage that can help you get better lease terms.
You know the physical features of the building and how it has worked in the past. Let’s say you have been unhappy with the way the bathrooms look, how slow the elevators run, how the HVAC system works, etc. You should be specific about these issues in negotiating your lease renewal. Seek specific improvements. Figure out a reasonable dollar value for each improvement to be made and push for a penalty or consequence if changes agreed upon are not made within an agreed-upon time period.
Look Closely at Your Current Lease
Your smart move to have a commercial real estate tenant representative regularly perform detailed escalation audits every year of your current lease for industrial property is about to pay off.
You have more inside information that can be extremely valuable in structuring a lease renewal. Done properly, these annual audits show you how well your landlord runs the building. You know what the mark-ups are for certain kinds of important as well as incidental services.
Moreover, these audits will show you whether
- your landlord bills twice for the same services
- you are paying for services supplied for free to other tenants
- your landlord uses insurance reimbursements as a cost center
- your costs compare favorably to the market.
Use this information to improve critical business and operational terms in an extended lease. In the hands of an effective tenant representative, the data from these audits give you a second chance to get the lease terms you really wanted the first time around.
Openly Seek Out Options
Tenants often say they want to handle a renewal of their lease for industrial property or other property on their own in order to preserve good relations with a current landlord. The unfortunate effect is that it reinforces the landlord’s belief that you have no options and don’t take the idea of lease negotiations seriously. It’s a clear sign that you are willing to settle for whatever is offered.
Handling a lease renewal should be treated like any other business operation: Assess all of the relevant options and select the best fit. It’s important to let the building owner know that this is your approach to whatever terms might be offered in a lease renewal.
When a landlord sees that you have a tenant representative examining the marketplace for you, the landlord is likely to more realistically assess the worth of renewing your lease. When you let building owners know how serious your are about weighing your options, you may get incentives very similar to those offered to new tenants. You might also get a better rent structure. A representative familiar
with the market can be invaluable.
Know the Worth of Your Lease
Don’t let the cost of moving become a stumbling block in negotiations for renewing a lease for industrial property. It’s true that no matter how good a deal you might get by moving, you will also incur costs. And they can be substantial–the cost of the physical move, new telecommunications wiring, perhaps costs of building out a new space that goes beyond what the owners will supply, new stationery, perhaps new furniture, etc.
Yet the landlord, too, will see big costs if you leave for more favorable terms elsewhere. They include
- potentially lost revenue
- promotional costs
- brokerage commissions
- infrastructure refurbishment
- demolition costs
- build-out costs.
In every situation, these costs to the landlord can be quantified with a high degree of accuracy. They should be part of talks with the landlord to maximize the value you get as a renewing tenant.
The difference in what a landlord will spend to get a new tenant and what they will spend to keep you can be substantial. It can easily exceed a year’s rent. A tenant representative can develop properly structured negotiations so that at least some of these savings can be used to lower your costs if you decide to renew your lease for industrial property.
Be Prepared to Move
You’ve analyzed the market. You’ve taken into account all relevant factors. And ultimately you’ve determined that moving will give you a substantially lower present value occupancy. Then you probably should elect to move.
Moving for marginal savings of 2% or 3% might not make sense. But if projected savings are 5% or more, this is likely your better option. It doesn’t matter how specialized your facility is, how convenient is its location or what the cost of build-out will be.
If a thorough site selection process, including a financial and lease analysis, shows you can get better terms elsewhere, it may be time to move on. Occupancy costs are often the second largest fixed cost a tenant faces, up to 50% of net revenue. You can’t ignore significant savings.
Managing occupancy costs is a critical corporate responsibility. When landlords understand that lease renewals are not a sure thing and tenants regularly subject lease renewals to an objective, market-driven process, the result is likely to be lower occupancy costs across the board.