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By underestimating the economic benefits to be gained from a routine renewal, tenants may miss a major cost-reduction opportunity.
Landlords are acutely aware of the difficulty tenants have in moving and will look to use this awareness to their advantage. The decision to renew or relocate should not be made solely on the basis of per-square-foot rental costs. Tenants need to evaluate “remain-in-place” issues such as:
- What’s the difference in required space needs at the current building vs. a relocation?
- What ability exists to upgrade the existing space for technological improvements and what capital is required to do so?
- What disruption to business will present itself during any renovation or upgrades to the space?
- What ability will remain to reshape the organizational image or culture, if desired, in the current space?
- What expansion opportunities exist in the current space?
- What opportunities exist to amend an existing lease and how can the tenant take control of the negotiation timetable?
Landlords believe they operate from a position of strength in a renewal negotiation because they perceive they have better market knowledge than the tenant, control of the process and timetable, and an appreciation of the tenant’s “inertia” and the real cost of moving.
Tenants can level the playing field by engaging a tenant representation professional to act on their behalf just as the landlord has his or her own brokerage professionals representing his or her interests. When a tenant engages a professional to represent them, the landlord will understand that the tenant is serious about pursuing relocation and that they will be aware of all relocation opportunities and “remain-in-place” issues. In other words, in engaging a tenant representation professional, a tenant will level the playing field by engaging their own team who will have the same information the tenant’s landlord does to evaluate renewal and relocation scenarios.
Step 1- Create the Program
We start with a space planner who creates a “program” of a tenant’s space need. A program identifies the number of offices, cubes, conference rooms, server rooms and the like that is required for the operation to function optimally. It identifies adjacencies (where everyone sits for optimal collaboration) and allows tenants to rethink their business workflow. As tenants evaluate other spaces, the space planner will perform test fits to see how a tenant’s program works in alternative buildings. This exercise will validate how tenants can use the reworked space and confirm how much space tenants will need to take in a new location. Because of loss factors, building core types, and building layout, different buildings will require different footprints for the same program.
Step 2- Create the Financial Model
We then create a financial model for the renewal space allocating the costs and risks to the landlord associated with vacating a tenant’s space. This analysis should take into account the submarket and overall absorption trends of the area, lost income created by time the landlord will need to lease up the space when a tenant vacates, required tenant improvements for a new tenant taking a tenant’s space, and credit risk.
Step 3 – Conduct a Credible Market Search
A critical part of any successful renewal strategy includes a credible search of the market, showing a tenant’s landlord that they’re serious about looking into alternative locations in order to reduce occupancy costs.
Step 4 – Identify and List the Key Elements for Renewal Negotiations
A tenant’s ability to maximize the economic benefit which a tenant achieves if they renew will hinge on their ability to assist in shifting the “market or valuation risk” from them to the landlord.
Every tenant’s renewal strategy should be tailored based upon their current office building’s situation. However, there are four key elements that always need to be developed and implemented by your brokerage professional to execute a successful renewal strategy:
1. Lease Provisions-The tenant team must have a clear understanding of its lease provisions, utilize favorable clauses to its benefit, and prepare defenses against potentially harmful provisions.
2. Understanding the Landlord’s Objectives/Constraints-A tenant’s brokerage professional should understand the issues and implications of the building’s current situation, including ownership profile and their financial objectives, building debt, tenant profile, including credit, rental rate proformas, rollover, and the market perspective.
3. Timing-A tenant must develop its occupancy strategy early enough to allow for a renewal to be developed outside of the renewal rights in the lease. The potential exists to negotiate terms and conditions tailored to a tenant’s needs while providing certainty to all parties.
4. Well-Defined Tenant Objectives-The tenant team must clearly define its renewal goals in terms of rent, escalations, work contribution, options and other lease rights. A tenant’s ability to define specific “target” prior to approaching the landlord will increase a tenant’s credibility with the landlord and ultimately the likelihood of a successful, fair market renewal.
What a tenant perceives as favorable renewal terms may be a downright steal to the landlord.