Time to Renew Your Office Lease?
Photo by: Riley Snelling©
Ways to Leverage Your Position Beyond a Reduced Rental Rate.
Business as usual is on hold as landlords and tenants find themselves in unprecedented times. Many businesses, unable to continue operating without significant layoffs and/or furloughs, are looking to cut costs in every way possible. For those in active lease renewal negotiations, or whose current term expires in the next 24 months, you have leverage. Given the uncertainty and rocky economic outlook, landlords are more willing to negotiate. Here are three levers to pull, in the form of concessions, to come out ahead.
1. Free Rent
Landlords expect to give at least a few months of free rent to a new tenant in their building; it’s included in their financial modeling. Hopefully you benefited from this when you entered the building and if you weren’t renewing and instead relocating, you would receive it from your new landlord. Assuming you’re a quality tenant, pay your rent on time and otherwise have a good relationship with the landlord, there is no reason you shouldn’t receive it when you renew. The landlord wants you to stay put — the headache you save by not relocating is also a huge relief to the asset manager. Position yourself as if you’re a new tenant in the building and reset the lease. A landlord is more willing to give a few months of free rent up front, rather than reduce the rental rate over the term of the lease. If your business took even a minor hit because of the pandemic, this likely works to your benefit freeing up a few months of cash flow. Where three months free rent is standard in most markets, you may find yourself getting 4 to 6 months as landlords do not want to find themselves with vacant space to fill during this time. Keep in mind your rental rate will increase to what is essentially market rates (or within 1-3% of that number), and the landlord may push to increase it a bit more to account for the additional free rent. A few free extra months can also be obtained if there are plans to update the space. In other words, request additional free rent during the time your space is under renovation.
2. Tenant Improvement Allowance
Similar to free rent, landlords expect to contribute some dollar figure towards essentially renovating the space when you’re a new tenant. If you’re renewing, you’ve likely been in the space anywhere from 8-12 years and need a refresh. Things like fresh paint, updated flooring, or bathroom renos are all fair game. Additionally, social distancing guidelines paired with overall employee sentiment indicating that open floor plans are not desirable,and numerous studies showing they actually hinder productivity (see here, here and here), indicate that this is the perfect time to revisit your floor plan. Whether it means adding additional private offices, privacy partitions or investing in flexible, modular solutions (like the Zenbooth Solo or Room’s privacy booth), you can negotiate an allowance from the landlord to contribute to your remodel. Be sure the provision’s final language allows you to apply the TIA to fixtures, architects’ and attorney fees, permit charges, moving costs, and even your own time spent securing zoning variances or permits. And finally, in the unlikely event you have any unused TIA dollars, the balance should be credited against your base rent.
3. Deferral Agreements
Even if your lease is not up for renewal, this is a lever you can pull. In asking for this type of agreement, you are essentially deferring rent for a period of time. It is reasonable for the landlord to request financial statements, inquire about how the pandemic has impacted your business and ask what you’re doing to mitigate the impact (PPP loans, etc.). Open communication is key here; landlords would much prefer you keep them in the loop and come to an agreement before it becomes a major issue. The deferral agreement will address the term of deferment, any interest accruing over that period of time, the payback period and possibly extend the overall term. In negotiating this agreement, the payback period should be pushed to 2021 at the earliest. If your business is struggling right now, chances are you’ll need a couple of quarters to get back on your feet.
