Many tenants assume their lease will be renewed on reasonable terms and accordingly leave only a limited amount of time for the renewal to be handled.
Things seem to start out fine, but then the landlord takes their time in setting a meeting and preparing a proposal for the tenant. Pricing improvements take longer than they thought. Then it turns out that the landlord’s proposal involves a higher rent or substantially higher costs than anticipated. Or, maybe the landlord isn’t willing to be reasonable about expansion or renewal options. At the point when tenants don’t have enough time to determine if a better alternative can be negotiated elsewhere, the tenants are stuck. That’s why a lot of tenants, including Fortune 500 companies and large national firms, often end up swallowing a bad deal. They fell into the landlord’s “time trap” – which is one of the simplest negotiating tactics, but highly effective and profitable.
At the very least, you can bet that as a renewing tenant, your landlord will offer lease renewal terms that are inferior to what is being offered to new prospective tenants. After all, new tenants are in the market shopping around and most of them are represented by a tenant representative. To attract new tenants, the landlord must be willing to match the competition in terms of rent, free rent, tenant improvements, building systems, communications capability, building security systems, electrical capacity, lobby appearance and other factors that are important for tenants. However, if you are a tenant interested in a lease renewal, the landlord presumes – and tends to be right – that you’re not shopping around much or at all. After all, you are already in the building, so you must have had good reason to locate there in the first place!
Landlords make it their business to know where their tenant executives live, how much the tenant likes the space, and so forth. Building managers and leasing agents ask tenants how much the tenant likes the building and why. The tenant is usually honest and tells them why they like the building without recognizing the potential future economic consequences. All of this information is then used by the landlord to determine how likely it will be that a tenant will want to renew their lease, which impacts the pricing and terms of the lease renewal proposal. The more likely a tenant is to renew their lease, the higher the rent will be (sad, but true).
Types of Captive Tenants
There are a couple of different types of captive tenants. The first type is due to the specific nature of a tenant’s business operations. Typically, this is applicable to manufacturers, for example, that have a high level of investment in equipment that would be very expensive to relocate. Another example would be a brewery, which also has unique requirements and zoning issues that make relocating extremely difficult as well as costly. When landlords have leases with these types of tenants, renewals can be extremely difficult to negotiate because the tenant has a very high cost to relocate.
The second type of captive tenant is the one that fails to plan ahead and as such, they become a captive tenant due to lack of time. This tenant likes the building and they “assume” their landlord will be fair on a renewal. They “assume” the landlord won’t use hard core negotiating tactics since they have been a good tenant. But, as more time ticks off the clock, the less reasonable a landlord will be and the tighter the noose will become. Many landlords complete the cinching of the noose by marketing the tenant’s space to other users, and bingo – the tenant reluctantly signs a bad deal. This strategy works all the time!
How Did We End Up with A Bad Lease?
Preserving good relations with a current landlord is often cited by tenants as a reason for “going it alone” when it comes to handling a lease renewal without the aid of a tenant representative. The unfortunate effect of such a strategy is that it completely reinforces the building ownership’s belief that the tenant is not seriously considering other space options. Not having a tenant representative is a clear sign that a tenant is prepared to settle for whatever is offered by the landlord and not a threat to move out of the building.
Handling a lease renewal should be treated like any other business operation – the management team makes a reasoned assessment of all relevant options and selects the best fit. But unfortunately, knowing all the options takes a lot of time and effort that most management teams just don’t have on their own. Landlords know this as well and don’t really fear that the tenant will move to a different building if the negotiations are being handled by a member of the management team.
Once a tenant is captive and working against the landlord’s clock, it’s difficult to turn things around. The landlord will have several things working to their tactical advantage at that point:
- It takes time to lease an alternative space and complete a corporate relocation and it costs money. Advantage landlord.
- Less time for the tenant means fewer actual space options. Advantage landlord.
- The lease likely has a holdover clause whereby your rent will automatically increase when the lease expires if a new lease hasn’t been completed. Advantage landlord.
In the end, a tenant’s “relationship” with the landlord is financial. The landlord provides a place of business and the tenant pays for it. Beyond that, most landlords regard tenants as a means to profitability and little else. This is especially the case with institutionally owned office and industrial properties where the building ownership is a pension fund, REIT, or private equity firm. They want your rent and that is the totality of the relationship, plain and simple.
Ultimately, tenants that do not have a plan to relocate – even if they have no interest whatsoever in relocating – place themselves into a captive position. Whether your company is a real threat to leave or not is irrelevant, because the landlord’s perception will be that your company wants to renew the lease and stay in the building.
When your company is represented by an ITRA Global advisor from the very beginning, the perception that you might relocate your space to another property immediately becomes a real possibility. Tactically, you will have time and expertise on your side – advantage tenant!! This alters the landlord’s perspective on your value to them as a tenant, introduces the fear of loss, and changes how the landlord will approach the negotiation from the first contact. Instead of contemplating how much money they can make if you renew your lease, your landlord will start thinking about how much money they could lose if you move out.
The Stevens Group is the Boston affiliate of ITRA Global, an organization of real estate professionals specializing in representing tenants, buyers and entrepreneurial startups in the leasing, acquisition and disposition of office, industrial and retail facilities. With coverage in major markets around the world, ITRA Global is one of the largest organizations dedicated to representing tenants and occupiers of commercial real estate.
Article submitted by Wayne Teig of our ITRA Global Minneapolis-St. Paul, office