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.
CREATE ‘PLAN B’
Once you have determined your lease renewal date, put yourself in a better negotiating position by locating alternative store locations you can move to if your landlord’s terms are not to your liking.
“The most common mistake is to only negotiate with the existing landlord on the current location,” says Dale Willerton, a Los Angeles-based tenant lease consultant and author of Negotiating Commercial Leases and Renewals for Dummies. “Doing so fails to give the landlord a reason to give you a good deal.”
The problem worsens if you tip your hand by letting the landlord know you are not shopping around.
“Suppose your landlord asks, ‘Are you looking at other properties?’” poses Willerton. “You might respond, ‘Oh, we don’t want to move—we are not talking with any other landlords.’ Right there, your landlord has you.”
It’s far better to line up some alternative locations where you can relocate if your landlord becomes unreasonable.
“You need to create some competition for the landlord,” says Willerton. “Ask yourself: Where would I go if I have to move? Do I have relocation options if this landlord will play hardball and double my rent?”
Having alternative locations in your pocket will give you the freedom to reject onerous terms.
“Tenants only get the best deal when they are walking away from the negotiating table—not when they are at it,” says Willerton. “Remember that landlords always hold something back that they will give up only if it’s clear the [tenant] might move.”
Indeed, having the landlord chase you as you are walking away from a deal is the best position to be in.
“The tenant is the landlord’s customer, and the customer deserves to be pursued,” says Willerton. “That is the mindset too many tenants do not understand.”
TALK IT UP
What’s the going rate for retail space in your town? Maybe it has changed since you last went shopping. You want to find out early in the negotiating process.
“Do your due diligence,” advises Sharon Kahan, first vice president at the Chicago office of CBRE, a Los Angeles-based commercial real estate company. “Investigate your local market and find out what other retailers are paying in your area.”
That means talking not only with real estate agents but also other businesses—especially those with property from the same landlord. They can tell you a lot more than just what they are paying.
“Some of your fellow tenants will have recently gone through the renewal process,” says Willerton. “They can give you some valuable insights into how your landlord negotiates.”
Also, your neighboring retailers can alert you to relocation plans of their own. That can be a major factor when it comes to the desirability of your current location.
“If you assume everyone else will be there after you renew, you might be wrong,” says Willerton. “You can lose four neighbors and get four new ones in a five-year cycle. Knowing someone is moving can make a difference in terms of your decision to stay or move.”
You may also find out some surprising things. Maybe the landlord is planning to reconfigure the space surrounding your store, or maybe an adjacent tenant with more bucks wants to expand—in your direction. “You want to find out such things in advance,” warns Willerton.
YOU GO FIRST
Successful businesses take the initiative when it comes to lease renewal negotiations.
“Most tenants think the landlord is going to come to them and remind them in a timely manner that their lease is expiring,” says Willerton. “But most landlords will not do that. That’s because they want the clock to tick right down to where they have you over a barrel.”
Suppose only four weeks remain before expiration, posits Willerton. What can you do if the renewal terms are onerous? There’s no time to move or negotiate. “Be proactive. Don’t lose your time advantage.”
Speaking up early is great, but don’t tip your hand.
“Too many times, tenants say the wrong thing,” says Willerton. “Suppose you see the property manager in the parking lot, and you casually say, ‘By the way, our lease will be expiring and we want to do some major renovations and look forward to five more years.’ You have just given the property manager a ‘buy signal.’ You have said you intend to stay. So why would the landlord do anything but try to raise your rent?”
And on that topic of renovations: Avoid doing them too close to renewal time.
“If you do a $100,000 renovation a year before your lease is up, you have just given a ‘buy signal’ that puts you in a bad negotiating position,” says Willerton. “Time your renovations to be concurrent with, or just after, renewal time.”
Check back Wednesday for the conclusion: terms and increases, and getting help.
Have a question or comment? E-mail our editor Bruce Beggs at [email protected].