Five Renewal Pitfalls
Renewals: What’s Next?
Real estate transactions can represent opportunities to save money, modify key lease terms, make facility upgrades and improve business performance. But when tenants negotiate without knowledgeable representation, the opportunity is often lost. We have identified five common and costly traps tenants can fall into during the renewal process. Isolated, these errors may have minor impacts on the transaction. However, in combination, the toll on your bottom line can be enormous.
Making False Assumptions About Cost
While a renewal may appear to be the most economical option at first blush, it may end up costing more in the long run. Because the commercial real estate landscape fluctuates with market swings, it is difficult to quantify the cost of relocating versus renewing. Only with the help of an experienced real estate advisor, and only through choreographed market competition and a full economic analysis of all viable options, can a tenant truly make an educated comparative assessment.
Because competition creates negotiation leverage, the more landlord suitors you have the better. It is one reason why timing is critical. Compressed project schedules severely limit your options and negotiation strength because they preclude long lead-time solutions like build-to-suits or existing building retrofits. But by starting the process well in advance of your lease expiration, you ensure every feasible option is available. Having options means your landlord has to negotiate within the confines of the market to retain you.
Under Valuing the Landlord’s Risk
Landlords and their representatives are skilled at defining the terms of the negotiation and focusing discussions on the tenant’s actual and opportunity costs associated with relocation. But a potential relocation represents significant risks and costs to the landlord as well. Beyond the loss of the income stream from your tenancy, landlords have to consider their debt service, operating expenses and taxes, marketing costs to backfill your space, and improvements required to secure new tenants. Prolonged vacancies can add up to millions of dollars of expenses and lost revenue. Knowing what’s at stake for a landlord is key to negotiations and something an experienced tenant representative can help you quantify and leverage.
Underestimating the Stacked Odds
Negotiating leases is part of a landlord’s core business. They do it every day. They know the market, including tenant demand, the performance of competing properties, and the pricing of competitive transactions. They know the lowest lease rate at which they can afford to make a deal as well as the total cost of a lease transaction, including concessions like free rent and tenant improvement allowances. Ultimately, they know just how valuable your company’s occupancy is to the value of their building. For most tenants, several years pass between negotiations, and so by default, landlords have an enormous knowledge advantage. An experienced tenant representative can level the playing field by equipping you with information that rivals and often exceeds the landlord’s.
Assuming Commission Savings Will be Passed on to You
Landlords typically calculate brokerage fees into the cost of owning and leasing their properties. When tenants negotiate renewals directly, many assume the landlord passes this commission savings on in the form of a reduced rental rate or concession. But by self-performing, tenants give up market leverage and forfeit vital market information that could radically impact the landlord’s renewal proposal. Like any business, it’s not in the landlord’s interest to reduce its return, and what your landlord may propose as savings on broker fees is often a fraction of the value a savvy real estate professional can provide.