Renewing Your Lease? Don’t Become a Captive Tenant!

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Many tenants assume their lease will be renewed on reasonable terms and accordingly leave only a limited amount of time for the renewal to be handled. Things seem to start out fine, but then the landlord takes their time in setting a meeting and preparing a proposal for the tenant.  Pricing improvements takes longer than they thought.  Then it turns out that the landlord’s proposal involves a higher rent or substantially higher costs than anticipated.  Or, maybe the landlord isn’t willing to be reasonable about expansion or renewal options.  At the point when tenants don’t have enough time to determine if a better alternative can be negotiated elsewhere, the tenants are stuck. That’s why a lot of tenants, including Fortune 500 companies and large national firms, often end up swallowing a bad lease deal.  They fell into the landlord’s “time trap” – which is one of the more simple landlord negotiating tactics, but highly effective and profitable.

At the very least, you can bet that as a renewing tenant, your landlord will offer lease renewal terms that are inferior to what is being offered to new prospective tenants. After all, new tenants are in the market shopping around and most of them are represented by a tenant representative. To attract new tenants, the landlord must be willing to match the competition in terms of rent, free rent, tenant improvements, building systems, communications capability, building security systems, electrical capacity, lobby appearance and other factors that are important for tenants.  However, if you are a tenant interested in a lease renewal, the landlord presumes – and tends to be right – that you’re not shopping around much or at all. After all, you are already in the building, so you must have had good reason to locate there in the first place!

Landlords make it their business to know where their tenant executives live, how much the tenant likes the space, and so forth.  Building managers and leasing agents are required to ask tenants how much the tenant likes the building and why.  The tenant is usually honest and tells them why they like the building without recognizing the potential economic consequences.  All of this information is then used to determine how likely it will be that a tenant will want to renew their lease, which impacts the pricing and terms of the lease renewal proposal.  The more likely a tenant is to renew their lease, the higher the rent will be (sad, but true).

Types of Captive Tenants

micro brewery tanksThere are a couple of different types of captive tenants.  The first type is due to the specific nature of a tenant’s business operations.  Typically, this is applicable to manufacturers, for example, that have a high level of investment in equipment that would be very expensive to relocate.  Another example would be a brewery, which also has unique requirements and zoning issues that make relocating extremely difficult as well as costly.  When landlords have leases with these types of tenants, renewals can be extremely difficult to negotiate.

The second type of captive tenant is the one that fails to plan ahead and as such, they become a captive tenant due to lack of time.  This tenant likes the building and they “assume” their landlord will be fair on a renewal.  They “assume” the landlord won’t use hard core negotiating tactics since they have been a good tenant.  But, as more time ticks off the clock, the less reasonable a landlord will be and the tighter the noose will become.  Many landlords complete the cinching of the noose by marketing the tenant’s space to other users, and bingo – the tenant reluctantly signs a bad deal. This strategy works all the time!

Once the lease actually expires, if the tenant hasn’t agreed to renew the lease by that point, typically there is a holdover clause whereby the tenant is required to pay a higher rental rate – a penalty.  This clause gives the landlord another arrow in their quiver to pressure a tenant into signing a deal that they otherwise would not sign.  In some cases the landlord may forgive holdover rent as an incentive for the tenant to sign, but if the market supports the landlord, then the holdover rent will likely be charged to the tenant as per the lease.

How Did We End Up With A Bad Lease?

Preserving good relations with a current landlord is often cited by tenants as a reason for “going it alone” when it comes to handling a lease renewal without the aid of a tenant representative. The unfortunate effect of such a strategy is that it completely reinforces the building ownership’s belief that the tenant is not seriously considering other space options.  Not having a tenant representative is a clear sign that a tenant is prepared to settle for whatever is offered by the landlord and not a threat to move out of the building.

Handling a lease renewal should be treated like any other business operation – the management team makes a reasoned assessment of all relevant options and selects the best fit.  But unfortunately, knowing all the options takes a  lot of time and effort that most management teams just don’t have on their own.  Landlords know this as well and as such, landlords don’t really fear that the tenant will leave and move to a different building if the negotiations are being handled by a member of the management team.

When it comes to renewing tenant leases, landlords also think they will have the opportunity to sweeten the deal terms at the very end of a negotiation to “save” the deal if they have a tenant actually say they are moving out of the building.  In many cases, landlords are able to “save the deal” and keep their tenant, but it merely reinforces that landlords can otherwise attempt to gouge their current tenants with limited risk of actually having their tenants move out.

In the end, a tenant’s “relationship” with the landlord is financial.  The landlord provides a place of business and the tenant pays for it.  Beyond that, most landlords regard tenants as a means to profitability and little else.  This is especially the case with institutionally owned office and industrial properties where the building ownership is a pension fund, REIT, or private equity firm.  They want your rent and that is the totality of the relationship, plain and simple.

How ITRA Global Creates Leverage On Lease Renewals

ITRA Global Crest Commercial On Bottom LargerAt ITRA Global, we have proven strategies for maximizing the value of any renewal – even if you are 100% committed to staying at your current location.  Our process won’t allow your company to get pushed into a captive position or otherwise fall into the usual landlord traps.  On the contrary, we introduce competition for your business into the marketplace so that your current landlord is negotiating from an entirely different viewpoint.  Our involvement changes the negotiation dynamics very quickly because we create leverage, and that moves the needle in the tenant’s favor!

We understand the landlords playbook and how they use time to their advantage.  When a landlord knows that you are having an ITRA Global tenant representative objectively evaluate the marketplace on their behalf, they are going to quickly become more realistic about what renewing your lease is worth to them as well as the financial consequences of losing you as a tenant.   We make sure the building owners know you are serious about your space options and that relocating is a viable alternative.  Our platform creates doubt and the fear of loss in the mind of the landlord, which are powerful motivating factors in negotiations.  These time tested techniques allow us to secure concessions for you that are similar to those being offered to new tenants, as well as a more favorable rental structure than what you could achieve on your own.

Conclusion

Ultimately, tenants that do not have a plan to relocate – even if they have no interest whatsoever in relocating – place themselves into a captive position.   Whether your company is a real threat to leave or not is irrelevant, because the landlord’s perception will be that your company wants to renew the lease and stay in the building.  When  your company is represented by ITRA Global, the  perception that you may relocate your space to another property immediately becomes a real possibility.  This alters the landlord’s perspective on your value to them as a tenant, introduces the fear of loss, and changes how the landlord will approach the negotiation from the very beginning of the negotiations.  Instead of contemplating how much money they can make, they start thinking about how much money they could lose!

If your company has a local, national, or global real estate need, including lease expanding, contracting, merging, relocating or renewing one or a portfolio of office leases, contact our Minneapolis office today for an initial consultation.

About the author:

Wayne Teig is the President and founder of ITRA Global CREST Commercial in Minneapolis, MN.  The firm represents space users in real estate lease negotiations, property purchases, property sales, site selection, and strategic planning.

Note: Reprinted with permission of Wayne Teig based on Canonical Reference to ITRA Global blog article posted at http://itraglobal.com/news/press/renewing-your-lease-dont-become-a-captive-tenant/

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