As brokers, we negotiate leases, not just the rent. It should be more significant to our clients what we have negotiated out of a lease rather than just what has been left in the agreement. Considerations that impact the tenant’s operations and bottom line, such as reciprocal property maintenance responsibilities, length of term, early termination clauses, tenant improvement allowances, penalties for late delivery, lease guarantees, cancellation options, etc., can be much more important that just the rent in the long run.
This same holds true for renewal negotiations—especially in today’s climate, when property ownership is frequently changing hands and new owners have not been involved in the initial negotiations.
Many tenants think that renewals are about maintaining a healthy relationship with an existing landlord and, as a result, feel that the landlord will act reciprocally. Although many landlords do focus on maintaining strong tenant relations, not all are long-term real estate owners and have investment committees to whom they have to answer—not their tenants.
Actually, renewals are about leverage; tenants negotiating their own renewals are inherently captive at the table—there is no leverage and lack of leverage ends in poor results. Landlords are trained to anticipate a tenant’s intentions and respond accordingly.
Landlords recognize that they maintain the advantage in negotiations if the tenant is working directly with them on the renewal, as this means to the landlord that the tenant is not really in play to move. If a tenant were going to move, the first thing it would do is engage a broker representative. That puts the tenant at a disadvantage and immediately raises the stakes in the negotiations. Every landlord knows that a broker will introduce the tenant to valuable market alternatives and information and therefore, bring leverage to the negotiating table.
As a result, many tenants naively leave a lot of money on that table. Some tenants want to make it quick and easy and merely threaten to move, and the landlord gets a premium every time for the tenant’s short-sightedness. Not many tenants are capable of negotiating better terms for a renewal than the best real estate advisors in their market.
Tenants often only see the rent as the headline cost and don’t understand the additional costs. In almost every case, the landlord’s asking rent is too high. An unrepresented tenant may simply accept the landlord’s proposal, because a tenant without access to market options is not in the best position to make an informed decision.
Every negotiator’s position benefits from competitive leverage. The best way for a tenant to foster this is to engage in renewal discussion as if it is a potential relocation:
• Utilize the leverage of ‘leaving,” which is extremely powerful in these soft market conditions. It is hard to achieve this believably without having a broker making it known to the market that you are out looking.
• True market knowledge is critical. Brokers, specifically those that represent tenants, see and retain major lists of comparable lease transactions. In a market that is not readily transparent, it is the baseline for understanding the market.
• A broker’s fee, which is typically paid by the landlord, is a relatively small portion of the transaction and is a small price to pay to get market knowledge and real leverage.
A lease renewal is not “just a renewal,” it’s a completely new deal. From a tenant’s point of view, they have access to little or no real-time market data, other than what they read in the general press.
Many tenants believe they can negotiate based upon what they are paying today; however, conditions can be very different, even within a market sector. Unless one knows where real transactions are being closed, it will be difficult to negotiate a new deal going forward and ensure they negotiate the best possible terms—and don’t get trapped by lease language that will bite them in the future.
Susan Arledge is president of Arledge Partners Real Estate. Contact her at email@example.com.