It is in the landlord’s best interest to renew a tenant’s lease. Although both tenants and landlords can gain from a lease renewal, landlords usually benefit the most from this situation. We have provided you with a case study to highlight the renewal issues:
Strategically, the tenant should obtain a reputable broker to negotiate the best possible lease renewal.
XYZ Corp. was renting space for $25.00 PSF in the Blue Building and the space suited the company’s future needs. There was no operational reason to relocate when the current lease expired. XYZ Corp. shopped around for other spaces and the asking price for a comparable space in the Red Building was $29.00 PSF. Relocation costs increased the total amortized cost to $33.00 PSF. The landlord offered a lease renewal at $28.00 PSF. XYZ Corp. did not not use a broker to negotiate the renewal of their current lease. Renewing the lease seemed to save the XYZ Corp. $5.00 PSF. This was a win/win scenario. They renewed the lease at $28.00 PSF. XYZ Corp. saved the time and expense of relocating and the landlord made an additional $3.00 PSF.
Both sides came out on top, right? Wrong! XYZ Corp. saved time and money by avoiding relocation, however:
The tenant failed to see his/her advantageous position in this scenario. The tactic most commonly used by landlords is to offer a renewal agreement below the total expense of relocation. In most cases, the tenant accepts the landlord’s offer feeling that the landlord has the upper hand without considering the flip side. Finding a credible tenant takes time and the landlord would have to cover for his/her losses during that period while a renewal would be added profit. The landlord would be more inclined to negotiate a competitive renewal agreement. XYZ Corp. failed to understand the economics of the renewal scenario from the landlord’s perspective. The landlord just made a profit while contributing very little.
Our broker would do most of the work and guide the tenant through a complex process, which requires patience and professionalism. The tenant must begin to explore his/her options very early, about 18 months before the current lease expires. This is important because the approval process in a corporate environment can be very long. Avoid a situation where you are forced into a renewal because of time constraints.
The tenant must hire a credible broker to offer alternative space options. The most effective strategy is to provide credible reasons for the decision to relocate and make the landlord perceive they are in the market for a new tenant. The “threat” of relocation must be real to the landlord.
The importance of a strong strategy will extract the highest value from a renewal situation. You can negotiate lower rent, better escalation , amenities, etc. The outcome will rely on the market, the landlord and the negotiation expertise of the broker and the tenant. The tenant will often benefit from this type of scenerio.