To Renew or Not to Renew: It’s a Risky Question

Part 1 in Our Series: Managing Real Estate Risk to Your Advantage

As you mull over your landlord’s renewal offer, ask yourself whether renewing your lease is your least risky option. The cost and disruption of shutting down and moving your business may seem like more trouble than they’re worth. But is this always the case?

Even if you’re planning to stay put and renew your lease, you still face risk:

  • Balance sheet risk – Occupancy costs directly affect your enterprise value. You can’t overlook the opportunity to improve your balance sheet by exploring your other options and aggressively negotiating your renewal.
  • Exit risk – If your rent isn’t competitive with other properties or your existing improvements aren’t up to market standard, you might have trouble subleasing your property in the future and you can expect the cost to sublease will be higher.
  • Rights and flexibility risk – Depending on what you originally negotiated, your lease may be missing terms that work to your benefit and flexibility. Also, some of your options in your lease may have expired or will expire when your lease ends.
  • Employee retention risk– Just because you’re committed to staying put doesn’t mean you can’t negotiate upgrades that improve the workplace for your employees and your operations.

As you consider renewing your lease, remember that you still have room to renegotiate — and that an effective renewal negotiation requires as much skill and expertise as drawing up a new agreement. In fact, the renewal negotiation is the competitor of the new lease negotiation, and vice versa.

Think Like a Landlord

Landlords know the market. After all, that’s their business. They’ll use that knowledge to their advantage. If your landlord knows more about the market than you do, you’re at an immediate disadvantage. You won’t have the negotiating leverage to get the best possible deal.

That’s why it’s smart to hire a broker and possibly a project manager for your renewal negotiations. By negotiating with competitive alternatives you’ll gain critical knowledge about the very best rent, terms, and project costs available to your company. And, you’ll be prepared to exercise your option to move.

Also, when your landlord knows that you’ve retained a broker, he must assume that you’ll take the best option available in the market. In other words, he is on notice to compete for your tenancy.

Here’s what your landlord doesn’t want you to know: he already budgeted for the tenant improvements and commissions that go into a new lease and will offer that same package to you to retain you as a tenant. Your landlord is as risk averse as you are. In almost every case, your landlord doesn’t want you to move — especially in this market. A vacancy poses significant risks for your landlord:

  • Potential downtime/vacancy risk of six months or more
  • Higher potential tenant improvement costs for a new tenant
  • The credit risk of a new tenant with no established payment history
  • Value deterioration of the building and possible subsequent impacts with lenders and investors

Turn Risk into Leverage

When you renew, you mitigate these risks for the landlord — and you should be rewarded by the savings your continued occupancy offers. But a smart landlord isn’t just going to accept your terms on blind faith. So here’s how you can make sure you get the best possible terms:

  • Make the experts your allies – Start with a qualified broker who can help you understand how your current lease stacks up in the market. Depending on the complexity of the project, you should retain a Project Manager who will only serve your interests and support your negotiations. (We’ll discuss this further in a future blog post.)
  • Plan ahead – If possible, put your plan in place with your broker in the fiscal year prior to your move. Budget realistically and schedule your plan of attack.
  • Issue RFPs to your landlord and competitive spaces – An RFP sends a clear signal that you’re considering all your options. Make sure that you directly compare your options. In your analysis, include move costs, cost of new furniture, fixtures, and equipment (FF&E), the tenant improvement (TI) package that each option requires, and the lease terms available to you. Get the bids required to underwrite all move costs. Your landlord will hear about it.
  • Plan to move – If your current landlord isn’t offering you a competitive market deal, prepare to move. Your landlord needs to know that you’re serious about it. Pricing the move cost will help you better understand this alternative.

At Forte Commercial Real Estate, we’ve helped scores of clients secure more favorable agreements, better rates, and better terms with their existing landlords. If a renewal negotiation or move is in your future, call us to discuss how we can make the landlord’s risk your negotiating ally.