Landlords make their biggest profits off of Tenants at Renewal Time. But most Commercial Tenants assume incorrectly that their Landlords will be fair at Renewal Time, so they start late and leave too little time for market research and negotiations. This is their first step into The Landlord’s Trap.
Commercial Landlords, unfortunately, also look at a Renewing Tenant as a “captive audience.”
Two Types of Captive Tenants
There are generally two (2) types of Captive Tenants.
The first type is due to the nature of a Tenant’s business operation. For example, this applies to manufacturers, which often have a high level of investment in equipment that’s expensive to relocate. Another example of this type of Tenant is a craft brewer, which has unique gear and zoning requirements that make relocating extremely difficult and costly. Medical and dental Tenants fit this profile, too. Lease Renewals can be extremely difficult to negotiate for this type of Tenant because they have extremely high sunk costs and relocation expenses.
Most common, though, is the second type of Captive Tenant, the one that fails to plan far enough ahead. It becomes captive with so little time left in its Lease Term that it can’t realistically consider a move. This Tenant assumes, often incorrectly, that its Landlord will be nice at Renewal Time. This Tenant wants to believe that its Landlord won’t use hardball-negotiating tactics because, after all, it’s been a model Tenant and now they’re friends.
Slow Dancing with Your Landlord
Things seem to start out friendly enough. But your Landlord, Property Manager or Landlord’s Agent does manage to take his or her sweet time to set up a meeting with you. And then it takes them a long time to put a written proposal in your hands. For some reason, it takes longer than they said to get back contractor price estimates on your refurbished tenant improvements. Of course, it’s time for them to lubricate The Landlord’s Trap again.
Then you get your first surprise.
The Landlord’s first renewal rent proposal is higher than you had hoped; the reason they give is that your tenant improvement cost is a shock to everyone. Your clock is ticking but no alarms go off. Your Property Manager wants to get another bid from a different General Contractor, but he’s on vacation for two weeks, gone hunting. Your clock ticks away.
Maybe the Landlord isn’t quite so cooperative about the expansion space you need or to offer new renewal options; you don’t get any. You go back and forth. Your clock ticks a little louder.
Finally, your alarm starts to go off. It dawns on you that you’re kind of stuck between a rock and a hard place. There’s not enough time to see if a better alternative is available to move elsewhere.
This is why lots of Tenants, including Fortune 500 Companies and national professional firms, too often end up having to choke down raw deals on their Lease Renewals. They fall into The Landlord’s Trap – a long stalling process that is a simple negotiating tactic – but nonetheless a highly effective and profitable one for Commercial Landlords everywhere.
What You’re Up Against
Landlords and their Leasing Agents are very savvy. They learn where a Tenant’s top executives live, how much the Tenant likes its space and when it’s time to fix the thermostats in your space. Property Managers and the Landlord’s Leasing Agents ask Tenants how and why they like the building.
Dumb like a fox, the Landlord’s team quietly gathers information. Tenants typically answer their questions honestly and politely, without quite realizing how it might cost them later, when the Landlord starts to play hardball.
Your Landlord uses this information to determine how likely you are to renew your Lease. It impacts the pricing and other terms of your proposed Lease Renewal. The more likely the Landlord thinks you’ll renew, the higher your proposed rents will be.
Works (Almost) Every Time
Despite the Renewing Tenant’s preconceived notions about being nice, the Landlord becomes less reasonable and flexible as time ticks by. The Renewing Tenant is caged and captive simply because it can’t fly the coop without a new place to go.
The Landlord can make the crate feel cramped by actively marketing the Tenant’s space on-line to The World and also showing it to Prospective New Tenants. The Renewing Tenant gets pretty uncomfortable watching unfamiliar folks sniffing around its space.
Simple as it sounds, this strategy works for Landlords and their Leasing Agents. Of course, they get lots of practice compared to Renewing Tenants who only play the Landlord’s game once every three to ten years. It’s no wonder that the Landlord and its sidekicks are better at it.
“Captured again, works every time,” laugh the Landlord and Landlord’s Agent over a craft beer and glass of wine after the Renewing Tenant reluctantly, finally signs the Landlord’s (very profitable) Lease Amendment for the Tenant to stay in the building.
Being Nice Is Nice
Preserving good relations with its current Landlord and Property Manager is the Number One reason Tenants cite for going it alone at Renewal Time. They don’t seek professional counsel and guidance. They don’t realize the high profits at stake for their Landlords and, consequently, for themselves.
By not bringing a Tenant’s Agent to Renewal Time, the unfortunate effect of this decision, right from the outset, is that the Tenant clearly Tweets to the Landlord that the Tenant isn’t serious about considering a relocation.
Even worse, it lets the Landlord, Property Manager, Landlord’s Agent and the Landlord’s Golden Retriever know that you will pretty much settle for whatever renewal terms and conditions the Landlord offers. No matter what kind of bluffing and threatening you do, your Landlord knows from the get-go that you aren’t really planning to pack up and call Mayflower.
Renewing Tenants don’t understand that their desire to be nice and agreeable is likely to cost them years of higher rents by not having a true advocate, a 100% Tenant Rep, on their side of the table.
Hard to Catch Up If You Fall Behind
Once a Renewing Tenant starts to work on the Landlord’s late-starting clock, it’s difficult to catch up and turn things around. By this stage, your Landlord has the following working in its favor, very much to its strategic advantage in setting The Landlord’s Trap…
- It takes significant time and effort to find, space plan, price out your tenant improvements, negotiate a letter of intent and New Lease for space at another building in order to effect a relocation, not to mention prepare construction drawings, obtain a building permit and actually construct your new tenant improvements. This time advantage, unfortunately, goes to your incumbent Landlord.
- If you start too late as a Renewing Tenant, like less than six to nine months out, it usually means you’ll have fewer viable spaces and buildings to consider. This selection advantage also goes to your Landlord.
- Most Commercial Leases contain a pricey Holdover Provision, which automatically increases a Tenant’s rent by 150% to 200% if the existing Lease expires and the Tenant has to “holdover.” This happens a lot when the New Lease and/or the construction of new tenant improvements are still being completed. It’s another deterrent to moving and a third big advantage for your Landlord.
That’s the sad tale of many smart but nice Renewing Tenants getting worse Lease Renewals than they deserve. This is how and why The Landlord’s Trap works so well.
The score is now Landlord 21 versus Tenant 0.
Before you call me to catch up, you might like to see the Office Relocation Timeline, prepared by our brilliant, 100% Tenant Rep colleague, Chris Carmen, in our Indianapolis Office. This Timeline is the Best Case Scenario if the world were perfect, which it seldom is.
Shake ‘n Fake Won’t Work
It’s tempting just to get it over with quickly. But you can’t fake it at Renewal Time, not against the Landlord’s savvy and fully prepared team. Figuring out your best alternatives takes lots of time and effort.
Your Lease Renewal should be treated like any other major business decision, with careful assessment and analyses of all options available in the market. You and/or your CFO can’t quit your day jobs for months to do the homework required to achieve the optimum outcome for your organization.
Remember These Key Facts
Recall how this blog article started: Renewal Time is when Commercial Landlords make their biggest profits off Tenants. Know, too, that Renewing Tenants are “cheap to keep” for Landlords compared to attracting New Tenants.
A Renewing Tenant doesn’t require nearly as much space planning or tenant improvements as a New Tenant. The Landlords’ legal fees at Renewal Time are considerably lower as well, since most Renewals require only a one or two page Lease Amendment to state the new rental rates and adjusted Lease Term.
If free rent is available in the market for New Tenants, Landlords try not to give any to Renewing Tenants.
Know, too, a Renewing Tenant that has paid its rent on time brings reduced credit risk to the table for the Landlord. It’s a known entity versus a New Tenant, which often is not.
Good Cop, Bad Cop
As a potential Renewing Tenant, you can bet that your Landlord won’t start by offering you terms as good as those proposed to Prospective New Tenants for your building. New Tenants actively shop the market, most of them represented by a Tenant’s Agent.
To get New Tenants, your Landlord has to meet or beat the competition’s rental rates, free rent and tenant improvement allowance, plus have the building mechanical systems (HVAC), a common conference room with WiFi, fast Internet connections, an on-site deli, security systems, good electrical capacity, a modern lobby and other features that today’s Tenants want.
However, as a Renewing Tenant, without a 100% Tenant Rep, your Landlord assumes that you’re not really shopping around much, if at all. You like the building and want to stay; the Landlord knows it.
You need a Bad Cop to disrupt and jam The Landlord’s Trap, to speed things up and to get you out into the market and see what other motivated Landlords will offer. Meanwhile, you can be the Good Cop with the Landlord’s Team, remaining nice, calm, cool and collected.
Throw A Monkey Wrench Into The Landlord’s Trap
What can you do to defend your company, professional firm, non-profit or government agency, to escape being a Captive Tenant, win against the Pros and also be the Good Cop?
It’s simple. Hire your own Pro to be the Bad Cop. That’s your Monkey Wrench.
Sign up a 100% Tenant’s Agent to advocate hard for your interests. (The Landlord will probably pay for it, but more about that in a second.) Avoid traditional Commercial Brokers, the ones whose companies have signs in front of buildings and list Landlords’ buildings for lease. They carry conflicts of interests in their briefcases. Besides, they only do Tenant Representation part-time.
On the other hand, at MacLaurin Williams we perform 100% Tenant Representation full-time, all day, every day.
Except in rare situations, your Landlord will pay us to be your 100% Tenant’s Agent and act as your advocate for a Lease Renewal. If you don’t hire a Tenant’s Agent, then the Landlord and Landlord’s Agent will both make more money, so it makes super sense to secure your own professional representation.
No More Starbucks & Krispy Kreme
Candidly, things are exactly the opposite of what too many Renewing Tenants think. Hiring a 100% Tenant’s Agent gets the Renewing Tenant immediate respect and prompt attention from the Landlord, the Property Manager and the Landlord’s Agent. They do not want to see MacLaurin Williams or any of our 100% Tenant Rep Offices coming in the door. They don’t want us on your side of the table, and for good reasons.
That’s also why your Landlord and Landlord’s Leasing Agent start their disingenuous jawboning at Renewal Time. “As a Renewing Tenant, why do you need to bring in an outsider? I thought we were friends. We were getting along famously. Well, it’s going to cost you more to have a Tenant Rep. No more Krispy Kreme doughnuts and Starbucks’ French Roast for you.“
Don’t worry. You’ll be able to afford the Landlord’s brownie points on your own, plus a new Cadillac, Lexus, BMW or Tesla, faster computer servers, R&D for new products and services, more salespeople and a new investment banker when we’re done with your Lease Renewal.
Leverage Levels The Playing Field
With an actionable plan to relocate, a Renewing Tenant – even if it has little interest in actually moving – removes itself from being in a high risk, captive Tenant position. It matters not if a company, professional firm, non-profit or government agency merely threatens to leave a Landlord’s building. The Landlord’s perception is almost always that you will much prefer to renew your Lease and not move out of the building.
When your organization is represented by MacLaurin Williams or one of our forty (40) or so Global Offices as your 100% Tenant’s Agent, the Landlord’s perception starts to shift, “Uh oh, this Renewing Tenant really might relocate.”
It sends a Tweet directly to the Landlord, Property Manager and Landlord’s Leasing Agent and puts them on notice that you will seriously analyze and evaluate the market against anything they put on the table.
Your Landlord has to start considering the prospect of months of vacancy and lost income, paying for operating expenses on your vacant space, spending extra TI costs to attract a New Tenant, covering another 30 to 90 days of lost income required to demo and build-out your empty space for a New Tenant, more marketing expenses and even higher legal fees.
To enhance this line of thinking, we can prepare an “Opportunity Cost Analysis” for your Landlord, laying out the likely costs to replace you as a Tenant. It’s actually a wise and reasonable way to kick off negotiations at Renewal Time.
As a 100% Tenant’s Agent, we take you into the market to develop and build leverage. That’s what we bring to your Lease Renewal party. Finally, you’ve figured out how to gain the advantage you need as a Renewing Tenant.
Now, the score is Tenant 22 versus Landlord 21. And your Landlord’s Team starts to worry, which is exactly where you want them.
To The Prepared Go The Spoils
By adding a 100% Tenant’s Agent to your team, you will fundamentally change the Landlord’s approach to your Lease Renewal.
“Dang that Renewing Tenant and MacLaurin Williams! They’ve figured out The Landlord’s Trap. It’s not going to work this time,” your Landlord grumbles.
As a 100% Tenant’s Agent, we minimize the profits that your Landlord makes off of your Lease Renewal. We thwart any attempts to treat you as a Captive Tenant at Renewal Time.
Our goal is not to create an adversarial relationship with your Landlord. It’s simply to ensure that you will receive a Fair Market Renewal. If we can achieve that and remain friendly with the Landlord, we will. However, if the relationship does become tense, then it’s far better that the Landlord’s ire be focused on your Tenant Rep as the Bad Cop and not you as the Good Cop.
Occasionally, though, a Landlord, knowing early on that you are going to the market with a 100% Tenant Rep, will sharpen its pencil upfront and show you the love in its very first offer to renew. That, of course, tends to reduce the climate for conflict but we can’t promise it will happen every time, just maybe.
Give me a call. We can confidentially chat at no charge and brainstorm about your Lease Renewal situation: William Gary, MBA, MIM, at cell +1 303-901-1108 or email wgary@MacLW.com. I can explain more about our process, how we help you to avoid The Landlord’s Trap and, ultimately, to win the best results at Renewal Time.
* Note: Portions reprinted with permission of Wayne Teig, based on Canonical Reference to ITRA Minneapolis-St. Paul’s blog article, Renewing Your Lease? Don’t Become a Captive Tenant!, posted at http://www.crestcommercialrealestate.com/site/news-events/renewing-your-lease-dont-become-a-captive-tenant.