I am always surprised by the amount of trepidation and angst tenants experience when it is time to renew the lease. To begin with, most tenants don’t realize when renewing a lease that they, in fact, are in a place of competitive advantage. Many tenants act as if they have very little leverage at all— and the majority of them will accept the first proposal that they receive from the Landlord without attempting to negotiate anything. Does this surprise you?
Renewing the lease does not have to be a stressful time. In fact, renewing the lease can be a downright fun experience. Here are some of the most common myths you may hear and how we debunk them.
MYTH NUMBER ONE: “We like you so much we’re not even going to raise the rent. Let’s just keep it exactly the same as it is now! Before you quickly say “Yes, Thank you for not raising my rent” you might want to know something about amortization and escalation.
AMORTIZATION- When tenants first relocate to a new office space, Landlords commonly build out the space to a tenant’s specifications. The cost of this work, known as the tenant finish allowance, is typically around $15 per square foot for the average five year tenant. That calculates to $3 per square foot per year ($15 psf ÷ 5 yrs = $3 psf per year). The finish amount can be lower or higher, but the number 15 is easy to work with, so please go with my example here.
Now jump ahead five years. The finish work is now fully “amortized”, or paid for. The Landlord may now only need to provide you with a new paint job and possibly new carpet. This work costs only about $5 psf or $1 per square foot per year. So by keeping the rent the same, the Landlord is now going to be making $2 psf more each year. Nice guy, huh?
ESCALATION- Most office leases are gross leases (full service) and have an escalation provision to pass along the increasing costs of operating expenses and real estate taxes over the base year. Over a term of five years, the rent may have escalated by several dollars per square foot. Therefore if the Landlord keeps the base year the same and does not update the base year to a new base year, then you have another potential increase in your rent of several dollars per square foot.
As you can see, with escalation, you may have hidden increases in rent that make your costs much higher than you think.
MYTH NUMBER TWO: “Hiring a real estate broker/advisor will simply add cost to the transaction.”
In many cases, when a lease is renewed and there was a real estate broker representing the landlord and/or a broker representing the tenant for the initial lease transaction these brokers are now entitled to collect a commission upon renewal. However when you, the tenant, hires a new broker to represent you in negotiations to renew the lease, all of that changes and your broker now is entitled to collect the fee that would have gone to others. So there is no new or additional cost to the transaction whatsoever.
In fact, as you have seen above, a broker who represents a tenant in negotiations to renew a lease can usually identify ways to save many dollars in the transaction, far more than the cost that any brokerage commission would be.
MYTH NUMBER THREE: “If I hire a broker my Landlord will be upset with me.”
Really! Landlords are real estate professionals. They do this every day. Would they really get upset if an expert shows up to represent YOUR interests? Having an advisor who is a skilled and experienced advocate for your position actually makes the transaction much easier for the Landlord and the Tenant to negotiate.
By hiring a real estate broker/advisor, it is true that you are sending the Landlord a signal he must compete for your business. You are also sending him a signal that you are prepared to quickly arrive at a fair bottom line, as you have done your homework. He will spend far less time trying to educate you about the transaction as you have a skilled representative to help guide you through the process, a true win-win.
SUMMARY- To sum it all up, you have a right to be represented by an expert who can help guide you through the entire process. You need to have the information necessary to equal the playing field in any negotiation, and renewing the lease, the second highest cost a business owner has right behind the cost of personnel, is no exception.
Renewing the lease does not have to be stressful and knowing that you are doing your due diligence can provide real peace of mind.
Categorised in: Renewal