Many tenants assume their lease will be renewed on reasonable terms and thus do not leave sufficient time for the renewal to be handled. Most times it turns out that the landlord's draft proposal entails much higher costs than projected. Because there isn't enough time to determine if a better alternative can be negotiated elsewhere, such tenants are trapped. That's why many tenants frequently end up accepting a poor 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. 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, tenant improvements, 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 assumes, and tends to be right, that you're not shopping around. The landlord figures you're concern is to avoid the cost and disruption of a move, and they 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 worthwhile option is to renew your lease, it will become your only alternative. You will be a captive tenant, and you could easily miss substantial benefits your landlord offers as inducements for new tenants.
Here's the process for maximizing the value of any renewal even if you are 100% committed to staying at your current location.
1. Use time to your advantage
Start early enough so you have time for all the normal phases of site selection, financial negotiation, financial analysis and lease negotiation. Give yourself enough time to walk away from a bad deal and continue negotiations elsewhere if need be. If you plan to renew at your current location, you should be actively assessing your options at least 18 months before your target move-in/renewal date.
2. Understand your options in the marketplace
If you don't have a good idea what lease terms other tenants in the marketplace are getting now, then you have no way of determining whether a landlord's proposed renewal is a good deal or a bad deal. Your landlord's offer could easily be inferior to what tenants In similar markets. This would be a substandard deal even though it might be an improvement over your original lease.
The rent and tenant improvement allowance are just the beginning. Landlords often hide the terms and conditions in the fine print. Terms which can undermine what you assumed to be a good deal. For instance, clauses such as operating expenses, electricity, use, sublease and landlord performance standards.
3. Use your knowledge of your current building operations to formulate the terms of your renewal
As a current tenant of the building you have a key advantage that can help you secure improved lease terms. You know the physical characteristics of the building and how it has functioned in the past. If you have always been dissatisfied with the way the common area bathrooms look, elevator waiting times, how the HVAC system functions, etc., your Tenant Rep should be specific about these issues in negotiating your lease renewal. Stipulate specific improvements. Insist on a penalty or consequence if changes agreed upon are not made within an agreed-upon time period. Implement the changes agreed upon with effective business terms in your new lease.
4. Analyze your current lease in terms of business and operational terms that have been inadequate
If, during your lease term, you have had regularly performed detailed annual escalation audits, this puts you in a position that can be extremely valuable to you in structuring a lease renewal. These annual audits show you how efficiently your landlord runs the building. Moreover, these audits will show you whether you're landlord bills twice for the same services, whether you are paying for services supplied to other tenants, whether your landlord uses insurance reimbursements as a profit center, and how your costs compare to the market. Use this information in improving critical business and operational terms during an extended lease term
5. Let your landlord know you are actively seeking alternative solutions for your space needs and that you are not a "captive tenant"
Preserving good relations with a current landlord is often cited by tenants as a reason for "going it alone" when it comes to handling a lease renewal. The unfortunate effect of such a strategy is that it reinforces ownership's belief that you have no options and don't take the prospect of lease negotiations seriously. It's a clear sign that you are prepared to settle for whatever is offered. Handling a lease renewal should be treated like any other business operation. The management team should make a reasoned assessment of all relevant options and select the best fit. It's important to let the landlord know that this is your approach to whatever terms they might offer.
When a landlord understands that you are having a Tenant Representative objectively evaluate the marketplace, they are likely to become more realistic about what renewing your lease is worth.
6. Understand what it will cost your landlord if you move out
A common stumbling block in renewal negotiations is the undeniable fact that no matter how good a deal you will get by moving, you will also incur costs that may be substantial. The cost of the physical move, new telecommunications wiring, perhaps costs of building out the new space that go beyond what ownership will agree to, new stationery, perhaps new furniture, etc. A good Tenant Rep will negotiate enough rent abatement to cover these costs.
The landlord, too, will incur substantial costs if you leave for more favorable terms elsewhere. For instance, potentially lost revenue, promotional costs, brokerage commissions, infrastructure refurbishment, demolition costs and build-out costs. In most cases , these costs can be calculated with a high degree of accuracy, and should be part of discussions with the landlord to maximize the value you get as a renewing tenant.
The difference in what a landlord will spend to attract a new tenant and what they will spend to retain you can be substantial, and easily exceed a year's rent. An astute Tenant Representative must use these savings to further reduce your costs should you elect to renew.
7. Be prepared to move if you can't get market-rate terms or if the space no longer works
If the financial analysis your Tenant Rep performs shows that a substantially lower present value occupancy cost will result from moving than this is probably the option you should select. Moving for marginal savings like 2% or 3% might not be warranted, but if projected savings are 5% or more, this is likely to be your better option.
Occupancy costs are often the largest fixed cost a tenant faces. In total they may consume up to 50% of net revenue. When landlords understand that renewing your lease is not a sure thing the result is likely to be reduced occupancy costs across the board.
