Are You Interested in Renegotiating Your Lease?
A couple of scenarios arise when companies consider renegotiating their corporate leases. One scenario is simply from the standpoint that the lease expiration date is 12 to 24 months away, and the corporate tenant wishes to take advantage of a weak commercial real estate market now by locking in to a lower rental rate or negotiating space improvements, or both.
The first step is to determine what the tenant’s current building lease is worth. As an example, let’s say ABC Company is paying a full-service rental rate of $24 per square foot per year. If ABC Company leaves, then the Landlord will be looking at a minimum of 6 months downtime to market the space, advertise it and pay additional real estate commissions, equating to more than a $12/square foot/year loss. On top of this, the Landlord will more than likely have to provide new Tenant Improvements (in commercial real estate lingo, we call those TI’s) to a new corporate tenant of $10 to $15/square foot.
If ABC Company was willing to stay in their current space, they would be saving the Landlord $5/square foot in TI’s plus $12/square foot in marketing lease time, or a total of $17/square foot. Therefore, a reasonable negotiating point here is the current tenant, ABC Company, should get a portion of that $17, maybe half (half = $8.50), in the form of 2 months’ rent plus tenant improvement dollars to spruce up their space with new carpet, new paint or new signage. For some Tenant Reps, this would be the end of it. However, we like to conduct as much research on a building and its owner as possible to generate additional leverage and negotiating power.
Another scenario is that of the struggling company. Monthly expenses for real estate is usually the second highest expense line item, right behind employee salaries. Sometimes, all a company can do after it has discounted its products/services, reduced inventory and shaved the payroll, is to approach the landlord and advise them of the situation. Having a third party (Tenant Rep) negotiate on your behalf is often a wise choice to guide the renegotiation. Tenant Reps often eliminate the possibility of heated friction between landlord and tenant and have the market knowledge of the current commercial real estate climate and how it compares to the tenant’s current space terms.