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If you have a commercial lease somebody had to negotiate it. And somebody has to negotiate it again upon the expiry. Regardless of your approach to the lease, here are some tips that you hopefully you find helpful - because negotiating a commercial lease doesn't have to be that hard.
“If you hire an agent I will have to add his commission to the rent.” Ever hear those words from your landlord? Seems to make sense. Add a middle man…the middle man needs to be paid…middle man’s fee embedded into the cost. Sure.
What your landlord does not tell you is a few other points about why you should hire that broker…
Even bad brokers know more about the market and leases than tenants.
Once you are exposed to where rental rates actually “land” (not asking rental rates), you likely will want to ask for a lower rent than if you never engaged a broker.
Your space is likely not the perfect space or best value in the market. Your agent will be able to find other, more suitable properties. That means you may start out thinking you will renew but then fall in love with something else. Although you may not decide to actually move out – you may use your new-found confidence to be more defiant on the renewal rental rates.
A good agent will target other areas of your lease other than just the rent. Would it occur to you to remove your makegood provision or ask for a tenant improvement allowance, or ask for an right of first refusal when you previously did not have one?
If a broker’s commission really adds to your rent, then the value of the building goes up. Read that again.
If you were going to renew at $20 but then brought in a broker and ended up renewing at $21 then the landlord now has a building where $21 is the market rate, not $20.
If all tenants hire agents to renew their leases and everyone renews at $1 higher and the building is 100,000 square feet, then the value of the building will go up by approximately $600,000 in today’s market (using a 6% cap rate).
So why would the landlord say this?
It is because when you hire a broker your odds of actually relocating go up from about 0% to about 15%. Further, the renewal rental rate will likely be NOT $21 but $20 or less and the landlord will have to pay the broker within the lower rental rate.
A good broker will bring some value. They will know leases and where the market is. A great broker is not afraid to get a bloody nose from your landlord. He or she will happily take flirting with other buildings to the next level, which will create Tip # 2….
Tell the truth, nothing but the truth…but not the whole truth.
You have to live with your landlord once the renewal is done.
It is an on-going relationship and remember that battle scars from a knock down, drag out negotiation may come into play when you need something fixed. However, you also pay rent for every day during the renewal term and rent is likely one of your biggest expenses.
How do you find the balance of being fair but negotiating from a position of strength?
Be honest and upfront about the hiring of a broker and looking for alternatives.
It is understandable that your lease renewal / relocation decision is a business matter and you have to do what is right for your company. Your landlord would not advise you to not hire an accountant or lawyer and using an agent to look at the market should fit into the same category.
I represented a tenant that was 150,000 square feet in a small market. There were no options that currently existed for them to pick up and move to.
The first words out of the landlord’s mouth in our first meeting were “Well we know the tenant is not going anywhere…so here is the proposal.”
It was at full price – thank you very much Mr. Landlord.
The solution was to talk to the tenant about other potential options – let’s invent an option to move to by building it.
We looked at moving outside their comfort zone – into the suburbs. Not only were net rents and realty taxes lower, but they could downsize by 30,000 square feet and end up with all the employees on one floor, not several. Given that their space also needed a significant facelift if they renewed, the numbers worked.
While it would have been a stretch for the tenant to really end up triggering this kind of a move, we went from dead in the water to having a credible alternative.
It was not our duty to inform the landlord how much of a long shot this other option might be – but we had to let them know we were not going to be held ransom on renewal.
Once we built the case that there was a viable relocation alternative, the landlord softened their position for fear that they would have 150,000 square feet of tired space to market.
As much as there was not an existing 150,000 square foot option for the client to move to, there were also no other 150,000 square foot tenants in the market to fill the space if the client moved.
Landlords care less about rent than you may think.
They typically care more about creditworthy tenants that are low maintenance. Much like how the rest of the world works, likeability is a major factor in decision making on lease renewals. Small tenants that are a pain to deal with and do not have a right to renew are often provided very expensive renewal proposals and in some cases are not even given the opportunity to stay.
We all know what having a poker face means. Keep in mind that although you are supposed to trust your broker, you are typically not present for all communication with your agent and the landlord. You do not know if the landlord is picking up any signals from her with respect to how keen you may actually be to renew your lease.
It is not a bad idea to show your indifference to the space options to your broker.
If you dial back your enthusiasm for what you really want to have happen and increase the excitement for the back up option, your broker will have a more genuine story to tell your landlord. It will change her demeanor and words that she chooses when communicating with your landlord.
Ever get referred to someone that you already use? There is no better confirmation that you have already made the right choice. Seek out innocent bystanders that could unknowingly confirm you have made the right decision.
One example would be to visit another tenant in your building. Talk to them about their experience with the landlord. See if you can find out what they pay in rent. Others will typically share if you share first. Since there is no shortage of real estate brokers who cold call, take a few minutes to pick the brain of the next agent who calls.