If you expect to get a fair and competitive rental rate and terms on your renewal, you need to start early and have a process.
Your Landlord is a professional. They probably have also hired an expensive real estate leasing company and have a $500/hour commercial real estate attorney. This is serious business.
Even if you have what is considered a small lease for a short 3 year term, you are with near certainty making a 6 figure business obligation. If you have 50+ employees, you’re more likely to make a 7 figure obligation and perhaps larger. You’d better take it as seriously as if your company was involved in a lawsuit of that size.
The Landlord’s asset manager gets his/her bonus based on how much they increase the revenue on your property. The highly paid professionals on their side have to justify their fees. They all work on several hundred leases each year. They are smart professionals.
Don’t expect to do this once every 3 or 5 years and outwit them. Your only chance for success is to create market competition. Accept that you are not a better negotiator than them, but the market is a better negotiator. If you can get other landlords to bid for the future income stream offered by your firm, that market force will apply downward pressure on your rent and improve the other terms.
Let’s suppose that you’ve decided that you don’t need professional representation, or at least have not made a final decision yet, your first and most likely choice is a simple lease renewal, and there is nothing too complex happening such as expansion, downsizing or major reconfiguration.
Before you get started, pause a moment to take in the big picture and assess where you stand. If you are planning to renew, here’s the likely situation: Your existing space is not perfect, but it works for you just fine. You, or your boss, decided “It would cost us a fortune to move” and lacking any other compelling reason, you’ve already decided to renew. You’ve not received a proposal from your landlord, but assuming they are “reasonable”, renewal is a forgone conclusion.
Regarding that thought above, “It would cost us a fortune to move”? A few points:
- It probably costs a lot less than you think. The physical move is approximately $.50/SQFT + $400 seat for cabling + furniture assembly if you have cubicles + minor IT and phone reprogramming. And a new landlord will, in almost every market in North America, provide a move allowance or free rent that will more than cover that cost.
- However much it will cost you, it will almost certainly cost your landlord a lot more. Vacancy, marketing, completely rebuilding the space for a new tenant, lost rents while the space is under construction, and free rent as a concession to the new tenant to entice their move equals a very big number.
- You’re doing your landlord a very big favor by staying. In fact, between 75% and 80% of all tenants renew their leases. So before they even have a conversation with you, they know that the odds are that you’ll renew. Imagine going to Vegas and knowing that you’ll win 4 of every 5 hands of blackjack.
Now imagine that the odds are reversed. The landlord is making a proposal to a company considering 5 possible locations. Their odds are now 20% rather than 80%.
Not so great for them and here is why: A commercial building is not worth it’s replacement cost without a tenant. When they sell, the building is valued on the income stream. And here is a small but very important consideration, so please excuse the all caps.
YOU CONTROL THE INCOME STREAM. YOUR BUSINESS IS THE INCOME STREAM.
You’ve got a lot more power than you probably realize. I know that it seems like the landlord is big and powerful, and that certainly is a nice big building that they own, but you can bet that the bank will come and take it away from them if they don’t keep it full of tenants just like you who pay the mortgage with those income streams. A building is, generally, a commodity. You don’t have to advertise to find people who will accept your rent money, but they have to advertise their space for rent. Think about that.