DON'T GAMBLE WITH YOUR OFFICE LEASE RENEWAL
One of the most common phrases I hear from office tenants is “the landlord is a friend” as reasoning why they don’t need professional representation. Ah, the Office Lease Renewal. Is there anything more misunderstood in commercial real estate? If you’re an office tenant considering going it alone I encourage you to re-consider. Below we’ll cover a few reasons why this is the case.
1. THE LANDLORD IS NOT YOUR FRIEND
Ok, maybe he is. Let’s draw a line of distinction here going forward. If you were not already friends with the building owner prior to leasing space there, the Landlord is Not Your Friend. His motivation for befriending tenants in the building is purely good business. By building a relationship with tenants the owner is able to change the dynamic from what it truly is – a business transaction. In a business transaction one would be primarily concerned with the financial impacts and wider implications for their operations. If the office lease renewal process is a chat among friends, this can re-frame the nature of the discussion entirely… entirely in the landlord’s favor.
2. THE UNREPRESENTED TENANT IS AN UNINFORMED TENANT
The tenant that does not seek a professional tenant rep to look after their interests will not be informed about the market. This unrepresented tenant may not even know what rental rates their building is quoting at the time of their lease renewal. If you don’t know the starting point during a negotiation how can you measure your results? How will you know if the deal on the table is a fair market deal? You won’t.
The friendly landlord would prefer this situation. The strategy of befriending the tenant means getting them to let their guard down. The tenant will develop a level of trust with the ownership. They will believe that the owner is looking out for their best interest. This can lead to the tenant making poor business decisions, such as representing themselves, not verifying the market conditions, and failing to check their deal against others in the building or in their area of town.
3. DON'T ADVERTISE YOUR INTENT TO RENEW
I regularly hear from office tenants that they plan to contact their landlord directly to initiate the office lease renewal process. Their intent is to secure a competitive deal on their own, and if that fails, to bring in a tenant rep to attempt improving the deal. Unfortunately, what this communicates to the landlord is that the tenant ultimately intends to renew the lease. Their intent to renew was so strong they did not even find it necessary to hire a broker. And now that the numbers aren’t attractive enough to them, they want to insert a broker. There is a right way and a wrong way to approach the office lease renewal. Can you guess which category this fall under?
Hiring a tenant rep broker at the beginning of the process would maintain the tenant’s leverage. The broker would ensure the tenant understands the market conditions, the rates for similar buildings, the vacancies in the area available for possible relocation. The broker would also ensure that the landlord understands this as well. The knowledge of the market and experience of the tenant rep broker will even the playing field for the tenant.
4. NEW TENANTS ARE GETTING BETTER DEALS
It is extremely common for new tenants in a building to secure more competitive deals than existing tenants. This is due primarily to the fact that existing tenants are statistically less likely to relocate. The landlord knows this and will use it to his advantage. Moving can be a hassle, and typically it is something to be avoided if possible. An unrepresented tenant will very likely leave money on the table because the landlord understands this. The tenant may focus exclusively on the rental rate, with little thought given to rental abatement, improvement allowances, master lease revisions, and other concessions which are typical for a new tenant to receive.
For tenants preparing to begin the office lease renewal process it might be useful to consider professional representation. You wouldn’t step in the court room to represent yourself with hundreds of thousands of dollars on the line – so we would you do it with the office lease? The landlord may be friendly, but the income of his asset (the building) is directly tied to the deal you agree to. His intent is to secure a higher rental rate, which is in direct opposition to your motivation as the tenant. As a tenant you may negotiate a lease once every 3-5 years. The landlord is doing this multiple times each year. Don’t go it alone, get representation.