Tips to Negotiate Before Renewing or Signing a New Lease
As recovery falters and with the anticipation of increased taxes in 2013, consumer spending growth is predicted to moderate buoyed by back-to-school and seasonal spending. Retailers with leases executed during the pre-recession peak now need a real estate strategy to navigate the ongoing recessionary trough.
As leases approach the expiration date, the renewal period is an ideal time to assess an opportunity to adjust rent, prepare to negotiate, and leverage lease restructuring. Anecdotally, merchants want to continue occupancy at reduced or present rents, avoid capital expenditure, avoid a costly relocation, or have the landlord fund improvements to the space. Landlords want productive merchants, optimum income and occupancy rates, lengthy lease terms, as well as avoiding any loss of income. Naturally, retailers have greater leverage when shopping center vacancy rates are high. Landlords have greater leverage when occupancy rates are high.
A few tips to help you prepare for your next negotiation round include the following.
1. Assess whether current rents are above or below market rates. Shop competing shopping centers and research multiple markets in order to know the present value of the current lease.
2. Determine how much term remains on the lease. Start the preparations early with as few as two to three years remaining on the current lease. Determine whether the space requirement for the retail business will increase or diminish. Ask the landlord for a copy of the stacking plan; the stacking plan provides a useful index of how space is allocated among the tenants. Ask the landlord if financing requires a renewal. Multisite retailers need to analyze the portfolio and individual locations identifying which markets are projected to have rising or falling rents.
3. Prepare to negotiate. With only the most attractive shopping destinations in top retail trade areas experiencing growth from new leases, now is the time to restructure leases. Create alternatives considering the landlord’s motivations: relocation, build-to-suit, closing or early termination. Ascertain if the landlord has use for the space and understand how the space could be used more efficiently. Prepare a list of alternative tenants to release the surplus square footage to and determine the cost of alterations. Work backwards from the targeted renewal or vacate date to set the timeline. Start proactively as landlords tend to delay the process when rents are stable or rising. Defer reinvesting in the site before or during the negotiations.
4. A few lease restructuring strategies are rent reduction, rent deferral, rent abatement, or loan conversion. The base rent, operating expenses, or both can be reduced. A portion of the rent can be deferred as a lump sum or as subsequent payments. Delinquent amounts can be forgiven in portion or entirely if the retailer remains current for the remaining term. Alternatively, amounts past due can be converted to a loan secured by a promissory note to be jointly defaulted with the lease.
5. Organize and control the communications, message, and media. Designate a single point of contact maintaining the power person in reserve. Understand the landlord’s financing and comparable transactions. Landlords will typically be motivated when rents are above market, interest rates are rising, or when offered an early renewal or extended term when fewer than five years remain on the current lease. Leverage negotiations across multiple markets.
Final tip? Negotiate only when ready.
Contributed by Michael Lagazo, a published commercial real estate and shopping center executive based in San Diego, CA. You can follow Michael on Twitter at @Michael_MBA.