Wednesday, September 18, 2013

When to Start the Lease Renewal Process?

“We should be fine if we start 3-6 months before expiration.”  It sounds good on the surface, but it’s a very costly mindset.  And it’s a deceptive mindset because many tenants never realize the harm that has been done.  Their landlords certainly won’t tell them!

What’s wrong with a 3-6 month timeframe? 
The process seems simple from the outside, so 3-6 months sounds just about right.  The landlord sends a lease amendment… if the tenant likes it they sign it and are all set for their new term.  If the tenant doesn’t like it, they threaten to leave.  The landlord gets worried, improves the offer, and THEN the tenant signs and is all set.  It seems like 3 months should be plenty of time, and 6 months is generous.

The problem with a 3-6 month window is that it tells a knowledgeable landlord (in no uncertain terms) that they don’t have to present their best pricing or terms.

What do we gain from a strategic approach?
A strategic approach to a lease renewal can favorably impact an organization's profit margins AND operational flexibility for years to come.
  • Profit Margins.  With rent being one of the largest expense categories for most companies, this is not where one wants an “off the shelf” answer.  A properly-approached landlord will put their best pricing on the table in all regards (base rate, additional rent, escalations, tenant improvement monies, and much more).  Since leases stretch for years and escalations compound, there’s a long-term value to every dollar saved at renewal.
  • Operational Flexibility.  Growth strategies, service offerings, competitive factors and more are subject to the terms of one’s lease.  There are many flexibility clauses that a landlord will never introduce in a direct renewal scenario that they will accept in a competitive renewal scenario.
How much time is required to execute a strategic renewal?
Looking at the total number of hours involved, the time required to execute a strategic approach is not significantly more than one would spend when asking the landlord for a renewal proposal.  The tricks are (1) this time will be spread out over a much longer period, and (2) it's critical to use a tenant representative.  The tenant representative will manage the entire process and landlord perception, requiring only that the decision-makers review the summary information and make the critical decisions.  The representative, by the way, will be paid by the landlord.

What is the optimal timeframe?
It is best to begin a lease renewal process at least a year before lease expiration – even if one has no intent of relocating.  The reason for this timing is landlord perception.  To get the best renewal offer from a landlord, the landlord must perceive that they are at risk of losing their tenant.  Creating this perception requires that the process begin early enough that there COULD be competing alternatives.
I sometimes begin renewal two years before expiration.  Many organizations have been pleasantly surprised to see a rent reduction before the expiration of the current lease term.

Why does it take a year to relocate?
The relocation process invariably takes longer than expected, largely because there are more – and longer – steps in the process than most people anticipate.  Consider the major components listed below.  With the exception of the first step, each of those steps often takes weeks to complete.
  1. Determining what/where is needed
  2. Reviewing the market to identify all options
  3. Property tours and economic evaluations
  4. Letter of Intent negotiation(s)
  5. Contract negotiation
  6. Space design and construction/modification
Again – the point is not that you WILL go through these steps, but rather the landlord’s awareness that you CAN go through them if required.

How does it all begin?
To determine the best timing for your specific situation, you’ll want to speak with a commercial real estate agent who specializes in commercial (only) leasing.  The right individual will know the owners in one’s area of interest, will know what to ask for in a lease, and will have the know-how to perform long term financial analysis.

My team and I would love to be that resource.  To discuss the specifics of your situation, call me at 404.547.2009.