Statistics show that typically 70 percent of all tenants renew their leases upon or before lease expiration, as renewing an office lease and staying in place is often the best solution for a company. From a landlord's standpoint, a renewal tenant often is the holy grail towards profitability. By renewing a tenant in place, a landlord avoids two factors that can equate to one to three years worth of rent: the allowances required to reconstruct space to a new tenants' standards, and lost rent/lease up time - the time lapse and inherent risk to replace an existing tenant's rent stream with another's.
So why is it that renewing tenants often pay the same rent as - or in some cases, more than - new tenants when there is a tremendous cost differential that can be passed onto them?
The landlord's job is to serve several masters with conflicting objectives: tenant, partners, owners, and/or shareholders. This dichotomy leads to an understandable mentality of "what is the least I can do to keep my existing tenants." This often translates to smaller allowances and concessions, higher rates, fewer liberties, and a dated expense stop for existing tenants - as compared to those terms cheerfully extended to entice new ones.
A successful renegotiation depends on several factors. The biggest mistakes existing tenants make center around dealing from an inferior knowledge base, waiting too long to start the renewal process, and sending buying signals to the landlord. Generally speaking, if a company has waited until 12-14 months remain on its lease to start renewal discussions, has not hired independent real estate representation, and/or has not surveyed building alternatives, it sends the incumbent landlord a signal he or she hears loud and clear - this is a captive, uninformed tenant that is not a huge threat to vacate the premises.
This starts the dance of the landlord slow-playing the existing tenant's renewal negotiations. The landlord knows the longer he or she can drag the negotiations out, the fewer options a company has to move, and the more the existing tenant has painted itself into a corner.
In leveling the playing field, it is critical to evaluate and be knowledgeable of several factors:
• Is the expense stop you are being quoted dated or reflective of an arm's length transaction?
• What are the typical concessions and allowances new tenants are receiving, and are you getting any of that value back in reduced rent?
• Are tenants on other floors benefiting - or will they benefit - from updated elevator lobbies and restrooms, when your renewal does not reflect such value?
• Is the landlord abating parking or after-hours HVAC to entice new tenants while you have not been extended the same concession?
• What is the net margin the landlord is receiving on new leases, and how do those compare to your renewal offer?
• Is there a large tenant in the building the landlord is catering to at potentially your expense?
A firm grasp of these issues is essential in maximizing an existing tenant's leverage and developing a negotiation strategy that will yield successful results.
Frank D. Ricca is senior vice president of The Staubach Company, a global real estate advisory firm. A licensed CPA, he has 20 years experience in commercial real estate negotiation. He can be reached at the company's Dallas headquarters.