Office tenants face an inherent disadvantage in the renewal negotiation, and they usually lose money when renewing their office lease unless the tenant retains a qualified, experienced tenant representation broker. The asymmetry in a renewal negotiation arises from the fact that, unless there is a compelling reason to leave, tenants will renew 70% of the time due to the cost and disruption associated with relocation. Tenants can shift the odds back in their favor following the guidelines below.
1) Hire a tenant representation broker.
Professional landlords conduct negotiations on a daily basis, while tenants are only in the market once every 3 to 10 years. A qualified tenant representation broker will know the terms offered by the current landlord’s competitors. The simple presence of a broker will signal to the landlord that the tenant is considering relocation, prompting more competitive terms from the landlord. For more on the value of tenant representation, see a blog dedicated to this one topic here, titled “Why Should I Retain a Broker to Negotiate my Office Lease?
2) Introduce competition for your tenancy.
The tenant must do this regardless of market conditions and its ability or intention to relocate. If the current landlord does not believe that the tenant is considering relocation, than the tenant has no leverage in the renewal negotiation. The tenant and his broker must convince the current landlord that the landlord is competing for the tenant, even if that is not the case.
3) Start early.
Allow for enough time to evaluate the market, negotiate the transaction, and (threaten to) relocate if necessary. The tenant must have enough time to relocate so that the threat to relocate is a valid one. By starting early, the tenant has enough time to make a legitimate threat to relocate, has enough time to walk away from the first bad deal renewal terms, and still has enough time to be wooed back by his landlord. If the tenant starts late, he doesn’t have the leverage, flexibility, or time to get better deal terms.
4) Landlord make first move.
Insist that the landlord make the first proposal, revealing his position first.
5) Do not accept the first proposal.
Ask for more than you can get. Make your first counter at least an equal distance on the other side of the goal as the landlord’s first proposal. For example, if the tenant’s desired rent is $20/sf gross, and the landlord starts with an initial proposal of $21/sf gross, the tenant’s counter should be less than $19.00/sf gross (but not too low as to end the negotiation).
6) No emotion zone.
Do not allow emotions to drive the negotiation.
7) Forget about loyalty.
Do not place economic value or goodwill in your previous tenure in the building. A tenant will not get a better deal because he has regularly paid rent for 15 years. Just the opposite! As a renewal, the tenant will get a less competitive offer than someone with no history in the building.
8) Too many cooks.
Only involve a few key personnel in the negotiation. Carefully control information. To get the best deal, your tenant representative may need to conceal some information and/or lie on your behalf. These efforts could be undermined if other parties are discussing the renewal/relocation.
9) Strategic thinking is vital.
Do not speak directly to the leasing agent or the landlord without your tenant representative, unless you have consulted with your tenant representative beforehand and worked out a strategy. Otherwise, you risk undermining a coherent negotiating strategy.
10) Get an attorney.
Retain a real estate attorney to review the lease and its amendments, but do not rely on your attorney to negotiate economic terms and do not rely on your broker to negotiate legal clauses. Make sure that your tenant representative and attorney are working in tandem.
For additional information about office lease renewal best practices, please contact Troy Golden at (630) 805-2463 or [email protected].
Source: The Oak Brook Office Report Blog
Photo Source: “Golden Number 10 With Spotlit” by Stuart Miles FreeDigitalPhotos.net