Do your homework before renewing the lease on your Tucson office space, retail space or warehouse space. You can get substantial savings.
Many tenants assume their lease will be renewed on reasonable terms. They don’t spend enough time for the renewal to be handled. Here’s what happens if you don’t.Let’s say it turns out that your landlord’s draft proposal involves substantially higher costs than you anticipated.
Because there isn’t enough time to determine if a better alternative can be negotiated elsewhere, you are stuck and now may end up swallowing a bad deal.
At the very least, you can anticipate that your landlord will offer terms inferior to what the landlord is offering to new tenants.
New tenants are shopping around. To attract them, the landlord must be willing to match the competition in a host of factors, including
- free rent
- building systems
- communications capability
- security systems
- electrical capacity
- lobby appearance.
As a renewing tenant, the landlord presumes – and tends to be right – that you’re not shopping around much.
The landlord figures you’re mainly concerned with avoiding the cost and disruption of a move and can offer you a lot less than a new tenant to keep you in the building.
Looking at only one option, renewal, could make you lose substantial benefits that your landlord offers as inducements for new tenants.
But even if you’re 100% committed to staying at your current location, you can maximize the value of that Tucson lease renewal.
Start Early on Your Tucson Commercial Real Estate Lease Renewal
You need to have enough time for all the phases of site selection, financial negotiation and analysis and lease negotiation, plus time to walk away from a bad deal and continue negotiations elsewhere if need be.
If you plan to renew your current lease, say for Tucson office space in the 50,000- square-foot range, you should actively assess your options at least 18 months before your target move-in or renewal date.
Study the Marketplace
You don’t know if your landlord’s proposed renewal is a good deal if you don’t know what lease terms other tenants in the marketplace are getting.
Your landlord’s offer could easily be inferior to what tenants in Tucson and across the country are getting. It could be a bad deal even though it might be an improvement over your original lease.
Rent and workletter allowances just scratch the surface. Every bit as important are terms buried in the fine print that can undermine what you assumed to be a good deal.
For instance, clauses dealing with operating expense, electricity, use and sublease may impose significant effects on your finances and flexibility.
Use Your Knowledge About Your Building and Landlord
You have a key advantage in securing improved lease terms in your current location. You know the physical characteristics of the building and how it has functioned in the past.
If you’ve been unhappy with the common-area lavatory conditions, elevator wait times, HVAC system functions or other issues, you should seek specific quantifiable improvements in your lease renewal negotiations. Calculate a reasonable dollar value for each improvement and stipulate a penalty or consequence if changes agreed upon are not made within an agreed-upon time period.
Analyze Your Lease for Better Terms
If you had a real estate advisor regularly performed detailed annual escalation audits, you have additional inside information that can be extremely valuable.
Done properly, these annual audits show you
- how efficiently your landlord runs the building
- what are the mark-ups for important and incidental services
- whether you are paying for services supplied for free to other tenants
- whether your landlord uses insurance reimbursements as a cost center
- how your costs compare to the market.
In the hands of an effective tenant representative, the data generated by these audits gives you a second chance to secure the lease terms you really wanted the first time around.
Tell Your Landlord You’re Looking
You may want to handle your own lease renewal so you can preserve a good relationship with your current landlord. Unfortunately, that reinforces the landlord’s belief that you have no options. It’s a clear sign that you are prepared to settle for whatever is offered.
It’s important to let the building owner know that you’re handling a lease renewal for your Tucson office space like any other business operation: Conducting a reasoned assessment of all relevant options and selecting the best fit.
This seriousness on your part will likely lead the landlord to become more realistic about what renewing your lease is worth. It can help you secure concessions very similar to those being offered to new tenants, including a more favorable rent structure.
Recognize Landlord Costs When You Move Out
Yes, you will incur costs, possibly substantial, if you move your Tucson office, retail or warehouse space, no matter how good a deal you get elsewhere.
Yet the landlord, too, will incur substantial costs if you leave. They include
- potential lost revenue
- promotional activity
- brokerage commissions
- infrastructure refurbishment
- demolition work
- build-out work.
What a landlord will spend to attract a new tenant as opposed to what they will spend to retain you could easily exceed a year’s rent. In every situation, these costs can be quantified with a high degree of accuracy.
The costs should be part of your lease renewal discussions to further reduce your costs.
Be Prepared to Move
If your market analysis shows that you can get a projected savings of 5% or more by moving, then this probably is the option you should take.
Managing occupancy costs, which can consume as much as 50% of net revenue, is crucial. No matter how specialized your facility, how convenient its location or how much you spent on build-out, it may be time to move on to a Tucson commercial property with better terms.
In the long run, subjecting your lease renewal to an objective, market-driven process is likely to reduce occupancy costs across the board.