Managing the lease renewal process is more than a necessary evil. It's also an opportunity for you to better tailor your company's real estate portfolio to achieve your goals. Once you've decided to renew a space, the negotiations start. Here are four strategies that can help you come out on top of the negotiation.
1) Starting Early
The more lead time you have, the more negotiating leeway you have. If you start talking to your landlord at least one year before your lease rolls, you have more than enough time to start looking at alternate spaces. He knows that, by the way. If the initial negotiations don't go the way you want, you can also wait and see if anything changes at the building that could make him more motivated to negotiate with you. Having extra time lets you slow the process down to let him sweat a bit, as well.
Contrast this with waiting until the last second. Your landlord knows that you can't get another space identified, signed and built-out. He can use this to extract more rent from you.
2) Treating Options as Optional
An option to renew puts more power in your hands at lease renewal time than you might realize. Read your option carefully. It usually specifies when you have to use it by and how long it lasts. It also tells you what your rent will be. What it doesn't say is that you have to use it.
What this means is that you can use your option if it gives you an at- or below-market rent. If, however, the market has stagnated or dropped, you can ignore it. In essence, what you would do is to just negotiate a new lease as if you had no option. With this in mind, your option caps how much a lease renewal will cost but gives your landlord no protection at all. It's just a starting point.
3) Knowing the Market
You've heard all of the cliches about how information is king or knowledge is power. They're cliches for a reason -- it's because they are true. The more you know about the market, the better your negotiating position will be. Here is what you or your corporate real estate broker should know:
- Market Rents. A $30 per square foot renewal offer might seem like a great deal if you're currently paying $32, but in a $28 market, you'd be overpaying.
- Market Occupancies. The more vacant space in the market, the stronger your negotiating position. Rules vary from place to place, but 10 percent vacancy usually divides between landlord and tenant-friendly lease renewal markets.
- Building Issues. If you know that a business in your building is moving or having trouble, you might have latitude to push your landlord since he might not want to lose your income in such unsteady times.
- Construction Pipelines. New buildings frequently offer discounted rents and generous TIs to get filled up. They can also spike vacancy rates upwards.
4) Finding a Win-Win
To make your lease renewal work, you'll probably have to find a deal that works for you and for your landlord. You can minimize what you lose in the process by figuring out what your landlord cares about and what you don't care about. That's what you give up. For instance, if you're a rapidly growing company that has cash flow problems right now, you might trade higher rent increases for a lower starting rent. An owner looking to sell might trade up-front free rent for a higher rental rate. Coming up with tradeable items reduces your negotiating pain.
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