You’re renewing your lease wrong...how to make a commercial lease an asset to your business, at any point in the term.
We hear a common refrain from our Tenant members that they don’t think there is anything to do when renewing their lease after the initial term. From a one-year to a 10-year deal, we can tell you one thing with absolute authority: That is simply not true. Today, we’re going to systematically break down the psychology of a good commercial lease as a business and how/why it’s important to make your negotiations count. It’s not about simply signing a short renewal document and moving on. If you want your lease to work for you and you should then let’s get started.
From office, retail or industrial tenants, it’s absolutely essential to never stop thinking about the importance, costs and structure of your commercial leases. This is 100 percent true for all tenants, not just office lessees. When you execute your initial lease there will be a primary term, sometimes there will even be an “option” to renew at some fixed or to-be-agreed upon rate, but we see businesses making mistakes with renewals every single day. We’re not kidding.
Even if you negotiated a GREAT lease up-front (hopefully you used Tenavox to learn and implement the right strategies) there are key considerations to make when you review a renewal. Let’s start with the right reasons.
If you’re considering a renewal it’s because:
The building serves your purposes from a pure physical space standpoint. It’s not too small or big; not too costly and providers the presence you’re looking for.
You have an existing option and feel good about the rate you previously negotiated.
Your space needs have not changed considerably and won’t during the additional term.
There are other reasons, but these are the main ones we have experienced and heard from tenants. Unfortunately, many many tenants make the mistake of not giving their renewal the same effort, care and consideration they did originally when they made the lease. I know it sounds easy, the LL will send you a shorter document with simple provisions (since there is already a primary lease in place, we’re just updating the business terms like RENT and TERM) but you should never let this seemingly “easy” renewal force you into a quick decision. If you learn nothing else from this blog, learn this:
Your renewal deserves the same care and attention to detail you gave to your original lease. Not moving is not a good reason to stop caring.
Why does this process seem so “easy”? Well, let’s look at the landlord’s thinking. When you are a commercial tenant, you literally pay the rent, and income is the ONLY universal way to properly capitalize and value commercial real estate. That’s right, your rent goes into a formula that allows landlords, brokers, lenders and investors to calculate with a pretty accurate range of value in the market. Without rent, buildings turn into speculative and often risky approaches. Solid, long-term tenants make the world go around in commercial real estate. So yes, here is what is most important to a landlord, in order.
NET rent, and increases to rent over the term. That’s the base rent only, expenses aren’t capitalized.
Term (anything less than 3 years need to be extended for a landlord to get full credit for the lease with a lender and buyer)
Credit (new tenants are viewed as riskier, just as national groups are given a lower risk score so they’re viewed more favorably.
So with these things in mind, now you know how the Landlords are viewing YOU. Here’s how we leverage each of these.
Rent. A fair deal does call for some increases to BASE rent over the term usually, but those should be capped and reasonable (maybe fixed for a portion and no more than 2-3 percent increases max). Expenses (controllable) should also be capped when possible so your total rent never gets jacked up due to a new management company.
Term. You can control this, the longer deal you are willing to sign the BETTER you make the landlord’s asset look. This is powerful. Sign a LONG lease when you can with very flexible options to expand, sublease, etc. to keep you from being landlocked without sacrificing value. You’ll also get more concessions like free rent and tenant improvements on a longer deal. Bonus!
Credit. This one you’ve (hopefully) created for yourself by completing a primary lease term (or come close to it) with a great payment history. Once you’re in business and have proven good payment history there should less questions on your ability to perform because you’ve literally done it before.
So how does a tenant put these factors into the “Dr. Seuss” machine to output a good result as a business. Well, knowing the psychology of a landlord and how important credit and term are, we always recommend renewing as EARLY as you can when it's appropriate (a couple years in for example into a five year deal). Landlords are almost always motivated to have a long term lease. You can leverage this in your favor. If you did not get expansion options in your first deal, ask for some now, you’ve likely earned it with good payment history. This gives your business space to grow without spending a dime, right now. It’s powerful stuff.
Finally, you need to change your psychology on a renewal. As mentioned earlier, even if you don’t plan on renewing you should consider taking your needs out to market. We’ve discussed how essential it is for a Landlord to retain a long-term, good credit rent roll and you are a part of that. Use it in your favor. When presented with a renewal (they will usually offer this 1 year from expiration, if not sooner, if you have not reached out on your own earlier) learn to strike an open-minded tone. Explain politely you are assessing your needs and going out to market. This will immediately signal to the leasing agent you are willing to move and force them to work harder to retain you. This simple statement will likely prompt an improved offer without you lifting a finger, in minutes.
Note: Now this does require taking market conditions into effect. When markets for leasing are at an equilibrium or strongly favor tenants you will be in a seriously good spot to negotiate a renewal at any point in the lease. When conditions favor you, strike. This oppositely applies however, if market conditions strongly favor Landlords (i.e. vacancy rates are low, 5% or something) then retaining your space may be more important since the market has less options available. It’s significantly cheaper for a landlord to renew a tenant than do a new deal.
Here is an example of the difference in simple terms.
5,000 S.F. Lease
Rent of $30/PSF/YR Gross
Five Year Deal
Commissions cost to LL (4-6%): $30,000-$45,000
Tenant Improvement Allowance: $10-15/PSF or $50,000-$75,000
Total Planned costs: $80-120,000
Commissions (2%): $15,000
Tenant Allowance ($5-10 PSF): $25,000-50,000
That’s right, a renewal saves the landlord TENS of thousands of dollars. That’s just in this example. Use this to your advantage when the market allows for it.
Note: Use Tenavox (research pages) to get a sense of your markets favorability (even your specific building!) so you know how to approach the deal. Again, even in a darn tight market that favors landlords, you are SAVING them money by renewing so ask for concessions like free rent and TI dollars. They have room to give!
Last note, if you have a really well negotiated deal with what landlord considers to be under market rates this is really key, they are literally waiting for you to come up and renew so they can raise it up to what they consider market. Keep an eye on conditions in your building and the immediate market and strike when the conditions favor you. It’s a rarity when conditions favor landlords (or tenants) for five to seven years. So when things like subleases and increased vacancy rates are happening in your market, consider working a renewal then. It may just save you a ton of money. Keep an eye on your conditions using Tenavox!
Alright, we’ve learned about the psychology, motivations and economics of a renewal for now! Here's the TLDR version :)
Watch market conditions closely, use Tenavox to keep track or if you’ve engaged a good tenant broker (like the ones in our exclusive VoxLink program) they should be updating you quarterly on conditions.
Consider hiring a broker for your renewal. It may seem like overkill but it's not. Tenant reps thrive on doing renewals and actually give more credence to your lease deal. Don’t be fooled, engaging a tenant rep is almost always a positive and they will save you FAR more money than they will earn in commissions. Just hire a good one :)
Engage with your leasing agent early when conditions favor you. Again, landlords and brokers almost ALWAYS benefit from a renewal because adding term is so powerful to the income capital stack of the building.
If you don’t know, ask! Our experts will get you connected to the right resources. Fast
So that’s our primer on renewing your lease. Whether it’s your first deal or your 10th, Tenavox can help. Joining our free insiders program can save you thousands from lease negotiations, to telecom costs and beyond...be smart and savvy with Tenavox.
Go forth and prosper!