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Don’t Automatically Exercise That Renewal Option!

blog photoEach lease expiration should be viewed as an opportunity to explore and develop alternative space options.
Only after an exhaustive search can the decision to either renew or relocate be made with confidence. Needless to say, this can be a lengthy process which should start well in advance of the lease expiration depending on the size of the requirement. If your first choice is to renew, this process will provide the much needed leverage you will need when negotiating with your current landlord. Most commercial leases typically run between 5-10 years. In well negotiated leases there are provisions to the rental agreement allowing a tenant to extend the length of the lease.

A general rule of thumb: Instead of immediately exercising your renewal option, try to negotiate each renewal term instead. However, if you come to a standstill, you should have a safety net of something already negotiated ready for your protection. This is especially true if your location is critical or if your business is difficult to move. Here are my three quick tips to negotiating this most important feature in any commercial lease. Pay close attention to the last one:

Always negotiate the renewal clause in the original lease

The rental rate for the renewal period can sometimes be a predetermined rate. It is more likely however that a renewal clause will state that the “fair market value” be used to determine a new rate. The fair market value itself should be carefully discussed and defined. Never let the landlord try to interpret what the FMV should be. Make sure that the FMV is defined as including items such as the tenant improvement allowances or concessions you might find from similar buildings in the same submarket for tenants of similar size and credit worthiness. This will, of course, require you to have a thorough understanding of current market conditions and knowledge of recent lease transactions. When you are able to stipulate a specific rental rate for the renewal option you protect yourself. If the market is higher than your renewal rate, you’ve already locked in the lower renewal option rate. If the market is lower than the renewal option rate, you are still able to try and negotiate the renewal rate down.

Know how to ask

Typically, concessions (or leasing incentives) include free rent and tenant improvement dollars. Business owners are sometimes shocked to learn that these concessions are also potentially available on lease-renewal terms.

Many times, landlords tend to take their existing tenants for granted. For landlord’s, providing concessions to an existing tenant is far less expensive than the cost to acquire a new tenant. Tenant improvement costs, legal fees, lost rent due to downtime all add up – don’t be afraid to use this as leverage. Of course, you have to know how to ask for incentives to get them; the landlord won’t graciously offer them out of goodwill.

Consider engaging howardcommercial

This is the most important tip by far: Don’t do this yourself.

Even if your company is somewhat familiar with the market and rental negotiations, you will best be served by engaging an experienced commercial real estate advisory firm whose job it is to represent your best interests and help negotiate the best deal the market will bear.

Give us a call at 314.821.0085 or send us an introductory email at doug@howardcommercial.net

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