Sunday, October 1, 2017

Lease Renewal: Owner's Debt is a Key Factor

It’s vital that tenants understand their landlord’s motivators, and one of the most important motivators goes far deeper than simply maximizing profit. Understanding and leveraging an owner’s debt timing can lead to significant cost reductions for tenants.

Building owners, particularly those who own large buildings, leverage debt. In the vast majority of cases, that debt’s interest rate is the single-most important determinant of profitability. If the rate goes up at loan renewal, costs increase and margins across all tenants are reduced. Conversely, a building filled with reliable tenants under long-term commitments can look forward to favorable rates at loan renewal and, thus, better profit margins. The reason for the rate differences is obvious – a building’s risk to the lender is reduced, leading to better credit terms.

So how can a tenant take advantage of this timing? A total paradigm shift is required. Tenants tend to look at their own expirations as the driving force behind a renewal… start 1-2 years ahead of expiration (to allow adequate time to pursue ALL options) and negotiate under the threat of a relocation if you don’t get what you want. But what if a tenant’s lease expires in 3 years, the building loan comes up for renewal in 1 year, and the tenant is OK with a 10-year term? If the tenant begins renewal negotiations now and renews just before the loan renewal date, the building loan will be renewed based upon 10 years of revenue rather than the 2 years previously in play. Any deeper concessions given to the tenant NOW will be more than paid for by the landlord’s improved renewal terms.

The key is being able to access this debt information and leverage it properly. And there are a few factors that must be true for the tenant, so it’s not a one-size-fits-all scenario.

Click here for a great CoStar article reinforcing this point.

We welcome the opportunity to help you assess your situation.