Commercial Lease Renegotiation: The Preparation Stage
1) Consider the potential positive impact of lease renegotiation on your business.
Clarify your reasons and understand the exact nature of your current circumstances. Compared to one, two, or even three years ago, what percent are gross sales down? What percentage increases the cost of doing business? What percentage is the net profit down? By what percentage has pedestrian traffic and phone calls to your business (or vehicle traffic to your mall or neighborhood) decreased? Please review and thoroughly evaluate your current lease. This is a time to seek to renegotiate more than just the financial terms of your current lease.
The financial advantages you can enjoy by successfully renegotiating your lease include, of course, a reduction in your rent. But there are also the possibilities to reduce or eliminate your annual rent increase and your contribution to the common area or triple your net expenses.
You can also get favorable non-cash benefits for lease renegotiations. Have your landlord contribute or make capital or cosmetic improvements to your rental property. If you are in a shopping center or industrial park, ask the landlord to make improvements to the common areas of your center or park. What if the landlord has completed any deferred maintenance that has not been taken care of?
Reducing or eliminating the securitization and / or lease guarantee will be helpful if economic times get tough and you need to escape your lease. A real estate professional may be looking to increase the current lease term and even add some lease option periods. Conversely, they may seek to reduce both the current lease term and the lease option periods. Is it time to increase or decrease the size of your rented space? What about an option or right of first refusal in case the space next to it is available?
Finally, many tenants do not consider obtaining more favorable terms related to possible future sales of their businesses until it is too late. Remember: Your business is located on your leased premises, and under your current lease, the owner has specific rights that could prevent the sale of your business.
2) Ask yourself: “Are there changes in my housing market?”
Seek to identify comparable properties and current market conditions and rentals. Evaluate the terms of your lease against comparable current market leases. Determine current openings at yours and at comparable properties. Once a comparable property review has been completed, it will be immediately apparent if rental rates and other economic terms have decreased. If a decrease has occurred, this is another perfect justification for renegotiating your current lease. In general, I recommend providing your landlord with proof of current local rental rate reductions. This also serves indirectly to advise the landlord that there are viable alternatives for you to remain their tenant.
3) Focus on your landlord.
Discover your landlord’s concerns and motives to reveal the best approach to take. As simple as it may sound, let your landlord do most of the initial conversation. The more you ask and learn about your landlord’s circumstances, the more you can understand what motivates him.
Once you’ve done these three steps to prepare, aim for the specific results that will occur. Develop and commit to a strategy to achieve the intended results and then formally involve the owner in the renegotiation of the lease.
For more information on the next steps to a successful commercial real estate lease renegotiation or to hire professional services on this matter, please contact me.