CHICAGO — It’s time for your lease renewal. Are you ready to negotiate? If you’re like many owners of service businesses, your answer is “No.” But a lack of preparation can be costly.
Rent is typically a business’ second largest operating expense after labor. And the common industry practice of adjusting staff levels to reflect a changing business environment simply won’t work with lease payments: You’re pretty much stuck with them once you’ve signed on the bottom line.
It’s more important than ever to negotiate a better deal in today’s real estate environment, characterized as it is by rising prices. The higher the rent, after all, the greater the damage to profits.
TERMS AND INCREASES
While five years is the norm for retail renewals, consider negotiating a longer term—say, 10 years—if that’s more to your liking. One benefit is that banks will only lend money for the length of your lease, and you may prefer a longer-term loan. You may be able to swing more years if you have been a good tenant, because long-term leases benefit landlords, too.
“Long-term leases are particularly valuable for landlords, because they help improve the value of a commercial property,” says Sharon Kahan, first vice president at the Chicago office of CBRE, a Los Angeles-based commercial real estate company. Conversely, you can negotiate a shorter-term lease if that’s better for your business plan.
And how about the rent increase percentage? Anything you can do about that?
“Most leases call for an increase of 3% per annum,” says Dale Willerton, a Los Angeles-based tenant lease consultant and author of Negotiating Commercial Leases and Renewals for Dummies. It’s important to negotiate for lower increases if you possibly can. “The big problem is that 3% compounded over 10 years is more like a 50% increase—not 30%.” And that can be onerous. “There is a limit to how much retailers can raise prices—and it is generally not 3% per year. So, the landlord is asking for something that the tenant cannot keep up with.”
You may be able to get a lower increase, says Willerton. “Some landlords are more open to lesser increases, saying that they just want to match inflation, which is seldom over 3%.”
You should also try to negotiate terms that go beyond pricing. Remember: Any inducement that can be negotiated on a new lease can be negotiated on a renewal. Maybe you can get some site improvements such as better lighting, a new paint job, or more attractive signage.
And how about some free rent, or a refund of your security deposit? Or some “tenant allowance”—money from the landlord to help build out your space? Or how about eliminating the personal guaranty? How about removing some clauses that you found unpalatable? Renewal time is the right time to put these and similar items in play.
Negotiating a favorable lease renewal is far more complicated than just signing off on a renewal option, and it will often pay to have some outside assistance.
Consider using a tenant broker. Bear in mind that they cost nothing to use because their payment comes in the form of commission splits with landlord brokers. At the very least, they can get you a fair price.
“A qualified commercial broker can reference comps and help you figure out what you should be paying,” says Kahan.
You might also want to consider the services of an attorney, who can be beneficial in other ways.
“Brokers are there to minimize costs,” says William D. Himmelstein, CEO of Chicago-based Tenant Advisory Group, a real estate tenant brokerage firm. “Attorneys are there to minimize risk.”
The broker will make sure your lease terms are competitive with those of other leases in your vicinity; the attorney will rewrite clauses that might put you at risk. Together, with your own investigations of the local marketplace, these professional services can help you turn lease renewal time from a costly exigency into an opportunity to bolster your bottom line.