Yet again, we met with another company and the story is the same!
So many of these companies signed leases in a "different" market, and the lease that they had agreed upon included an annual increase, or a rent escalation, usually of $.50 cents per square foot per year. The problem is, they are in their 3rd or 4th year of a long term lease and they are now paying an exorbitantly high price per square foot. In some cases, they are paying close to DOUBLE what the market rate is.
What is Rent Escalation?
Fixed rent over a longer-term lease is relatively rare. Sometimes, landlords insist on annual increases based on the percentage increases in the Consumer Price Index (CPI). If your landlord insists on rent escalations, try to arrange that a CPI rent increase does not kick in for at least two years. Then, try to get a cap on the amount of each year's increase. If you have to live with a rent escalation clause, consider a predetermined fixed amount, such as in the example above.
Unfortunately, there is a double-whammy happening for these companies:
First, they signed a lease at yesterday's rate, which has drastically been reduced based on today's market conditions. For example, they may have agreed upon $15.00/NNN per square foot, when today's asking rent for the same office space may only be $10.00/NNN.
Secondly, they signed a lease with an escalation clause which added a compounding amount each year to their price per square foot. For example, year one was at $15.00/NNN and year two at $15.50/NNN and year three at $16.00/NNN and so on.
You can quickly see in this example how a company, in year three, could be paying $6.00/NNN over what the market rate is. That's almost double!
These days, every expense your business incurs has the potential of turning your ledger ink from black to red. So you might want to think about the advantages of renegotiating your commercial lease. Not only does a commercial lease renegotiation help your business, it also helps your landlord as well.
What Is Lease Renegotiation?
Simply put, a commercial lease renegotiation is an opportunity for tenants to reduce rent, reduce or expand square footage, renew or extend lease terms and, if necessary, terminate the lease.
When Should You Renegotiate?
The best time to consider renegotiating a lease is at least 12 to 18 months prior to the expiration of the current lease. This way, if the renegotiation is not successful, you will have sufficient time to look for alternative arrangements. The absolutely worst time to start the renegotiation process is just prior to the lease's expiration. Make sure you leave yourself and your landlord enough time to work out the details.
Who Benefits From Lease Renegotiation?
On the surface, it seems that tenants have the upper hand when it comes to commercial lease renegotiation. Property owners make nothing if they can't fill the space, which is a big advantage tenants have. However, for tenants already occupying a property, the costs associated with having to relocate could outweigh the savings on the lease. With both sides looking to come out with the best deal, it makes sense that all parties settle on an agreement that is beneficial to both.
How To Renegotiate Your Commercial Lease
A professional commercial real estate group is your best bet when it comes to renegotiating your commercial lease. They will review your current lease, including terms and conditions, appraise your site and space to see if it meets your long-term business goals, establish your negotiation goals, determine what "leverage" you and your landlord may hold, and create a renegotiation strategy. Only then can the sit-down with the landlord begin.
A good commercial real estate company can do all that for you and more. Many of them work on a contingency basis, in which case your risk is minimized.
If you're interested in learning if you have a shot at successfully renegotiating your commercial lease, please contact me today.
Jason Tucker | Associate Director
Newmark Knight Frank, Inc.
34975 W. Twelve Mile Road | Farmington Hills, MI 48331
Phone: 248-848-4084 | Fax: 248-848-9041 | Cell: 248-431-8138
e-mail: jtucker@newmarkkf.com | Website: www.newmarkkf.com
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