Across the spectrum of commercial real estate tenants, lease renewals can be a daunting task that few executives and business owners want to deal with. However, renewal discussions need not be fraught with anxiety if you engage a commercial real estate advisor in ample time prior to your renewal deadline. This is a very important milestone in the lifetime of the lease because it provides for an excellent opportunity for a tenant to improve economics and potentially create a better work environment.
In many cases, the opportunity to negotiate is missed by tenants for several reasons depending on the structure of a lease. Typically, most office, industrial, and R&D/ flex leases require a tenant to provide the landlord notice within a window of 6 to 12 months prior to a lease termination date if they wish to renew. Missing this deadline is poor practice as it leaves you in a position with zero leverage to take advantage of a cost saving opportunity.
The best way to combat this scenario is to engage a commercial real estate advisor with knowledge of the leasing market that you are located in. In the present market, your real estate advisor acting as your representative is typically paid by the landlord and their services come at no cost to you. At R.W. Holmes, we take an approach that best leverages your time and efforts in getting the best possible terms whether it is at your present location or elsewhere in the market.
Areas of Negotiation
Growing pains are a part of life for every company. Whether you are an office, lab, or industrial tenant you need to make sure you are using your space effectively. Real estate comprises a different portion of a company’s annual budget depending on size, but no one wants to pay for something they do not use efficiently. If your lease renewal is coming up, this is an excellent time to inform your landlord that you need to reconfigure your space or expand.
There are also several areas of concern which tenants may not be aware of that are written into a lease document. For example, an office tenant paying on a gross lease basis is most likely responsible for a proportionate share of the buildings operating expenses which have increased annually since the base year. During renewal negotiations, it is best for a tenant to request that base years be reset to the next year following a renewal.
Space Refreshment Allowance
Another point of a negotiation for tenants of all space types is a request for interior maintenance or a space refreshment allowance. For industrial or R&D/flex tenants, this could mean replacement of an HVAC unit before it malfunctions. For office tenants, new paint and carpet is usually necessary after a period beyond 5 years in a space. While these transaction costs are material for a landlord, they are generally preferred over the costs of re-letting the space to a new tenant.
The Fundamental Benefit
An advisor can assist in this process by acting as a point of contact between a tenant and a landlord to negotiate optimal terms on your behalf. Using lease comps and inside market knowledge, we develop a course of action that maximizes leverage and minimizes effort. In some cases, it is best for the tenant to assess and identify market options. The best position for a tenant to be in is to have several lease proposals for competitive buildings in the market. In the event your landlord is not reasonable with you then you have the ability to relocate to a more attractive option.
Office and industrial lease negotiation is not for amateurs and can be time consuming. Even if you and your landlord are on the friendliest of terms, the smallest issue can drive a wedge in the relationship. By engaging a commercial real estate advisor that specializes in your market, you can save time and money as a tenant.