The Key to Optimizing the Lease You Want

Whether you’re are renewing your existing lease or need to move to new lease space, the negotiation process is critical.  I’m going to walk you through what you need to know, and explain the key to optimizing the lease you want.

Obviously, tenants are extremely valuable to landlords and understanding the cost to the landlord of renewing an existing tenant is considerably less than replacing a tenant.  Lets look at the math:

Landlord’s Costs Simplified:

So what does this mean for you?

It means the risk of losing you as a tenant is significant and is your LEVERAGE!

Leverage: the key to negotiating the lease you want

Allow yourself sufficient time. 

Time is the most important component. Without giving yourself sufficient time to do your homework and work with a broker, you have no leverage and the landlord knows it.  The more time you have to negotiate with your landlord, the more leverage you will maintain.

Tenant #1 tells their landlord they want to renew the lease two (2) to six (6) months prior to its expiration, the landlord knows they don’t have enough time to look at other buildings, negotiate a lease document,  complete buildout and move into the new space…advantage LANDLORD.  Under this example, you will likely miss out on other landlord concessions like free rent, larger Tenant Improvement Allowance, abated parking or other non-economic items such as a right of first refusal.

Tenant #2 tells their landlord they want to renew the lease one (1) year (although if you are a larger tenant I would recommend two (2) years or more) prior to its expiration, the landlord knows you have plenty time to access the market, tour buildings, negotiate a lease document, have the buildout completed and move into the new space…advantage TENANT.  This advantage is improved when the landlord knows you are working with a commercial real estate broker.  I know this might seem like a shameless plug but it’s true.

Vacancy in the building

When the building experiences significant vacancy, the landlord will be very motivated to fill spaces and they will you more than you need them.

Overall market occupancy

Obviously, if the market is experiencing low occupancy, the landlord will be motivated to fill the building and may even provide special lease terms to differentiate from the other options you have.
Landlord ownership structure

Properties have varying ownership structures which impacts owners’ motivation when leasing to tenants like you. For instance, if property is owned by a REIT (Real Estate Investment Trust), they are very motivated to receive cash flow. On the other hand, a private equity fund may be more interested in creating value within the building, which involves keeping the rental rates up but giving aggressive concessions to tenants. Many other ownership structures exist. Make sure you know what owner-type you’re negotiating with.

Time space has been vacant

How long has the space that you’re looking at been vacant? This gives you significant insight into the landlord’s level of motivation to fill the space.

Tenant’s level of understanding

If you can understand the needs of the landlord and speak to them, you’re well on your way to favorable lease terms. This is especially true if you are working with a broker (aka commercial advisor). When you are knowledgeable or hire a knowledgeable broker, the landlord takes your needs more seriously.

Leverage is only works when…

…You handle the situation with integrity.

While leverage is the most important component, it doesn’t work without integrity. I’ve seen tenants (not my clients) squander their credibility by unreasonable bluffing or trying to re-trade a deal.  Tenants that re-trade the terms of a deal often lose credibility.