September 12th, 2018
by Olga Hallstedt, Associate Broker & Advisor, Berkshire Hathaway Michigan Real Estate – Commercial; Broker & Principal, RESULTS! by Olga Hallstedt Commercial Real Estate Services, PC.
National companies know that Lease Renewals need to be treated just like a new location or relocation. Lease expenses can be reduced and those dollars fall to the bottom line.
So your lease is ready to expire… You see real-estate signs everywhere. You are talking to your Landlord about renewing your lease. In that conversation, your Landlord reiterates they love having you as an easy, quiet, well-paying tenant. As a reward, your Landlord agrees to only increase your rent by another 3%.
In turn, you mention that all kinds of spaces are available as evidenced by the proliferation of signs. Further, you indicate that you should not be subject to the 3% increase; after all your company is a good paying tenant. So, you push a little harder and you get carpet at Landlord’s expense and forgiveness on the annual increase for the first year only; done, a major business issue to strike off your list.
Sound familiar?? I know, I know, you’re a tough negotiator and quite good at it!
It is in the best interest for you and your company to work with a Realtor®, that is seasoned and specializes in commercial real estate. Commercial Realtors® do this for a living and usually you don’t even have to pay for their services since it is customary in the United States for the Landlord to pay commissions. What about your time? Do you have the time and “wear- withal” to make a significant impact on your rental expenses?
The biggest difference a Realtor® makes is the information which only Realtors® and Appraisers have access. With this knowledge of the “Marketplace” in space availabilities, factual information on what and which buildings have been leasing, understanding operating expenses and building improvements; the playing field is leveled. You now are in a position to negotiate with true information.
Leveling the Playing Field:
Below are realities that are typical in building ownership. If the Landlord is facing vacant space, they will be facing:
1) No rent for approximately six months to one year (add up those monthly rental payments with operating expenses),
2) Tenant Improvements. The Landlord will have to put some improvement dollars to make the space tenantable for most new companies. Paint and carpet are typical minimal improvements that run approximately $5.00 per square foot,
3) Real Estate Commissions – Usually in the range of 5-7% of the aggregate lease.
Below Are Several Points To Consider And Remember:
1) Don’t start your renewal thoughts and discussions three months before your lease expires. Start thinking about it and looking around at least one year before your lease expires. Renegotiating a lease is a process, just like finding new space. Also, the closer you are to the lease expiration, the more leverage your Landlord has and will anticipate your “renewal” at the highest dollar they can garner from your tenancy. Typically, there is a “holding over” clause. It is not uncommon to see that “holding over” charge at 150% of your current rent. I have also seen 200%. Without a lease renewal in place, that is a legitimate charge per your lease. Start early!
2) What are your operating expenses running and what all are you paying for? Taxes, insurance, lawn care and snow removal, management fees, etc… Wait, how much is that management fee? Is the fee Five percent (5%) of all your rent and operating expenses, or just base rent? This is a valid question, needs to be understood and is a good negotiating point. What about putting a cap on those expenses & eliminating pass-through expenses of art or other superfluous pass-throughs? It is typical in western Michigan that Landlord’s cover roof and structural expenses and repairs. Does your lease cover that?
3) What about rental abatements (instead of face-rate reductions), reducing or eliminating annual increases and other Tenant Improvements you would like to see in your space or the building? How can just a few of these points effect your company; savings of $5,000, $25,000 or $250,000?
In summary, consult a professional that has a fiduciary interest in you and your company’s success.
Landlords, don’t despair!! This is a good time to work with the concessions but increase the length of the renewing lease; securing income for your building investment with proven, paying tenants. You and your lender will be pleased in the long run with tenants that possess proven track records. Tenants are your lifeline. Vacancy is the costly enemy!