A decrease in rent, real estate taxes or capital exposure can have major impact on the bottom line. Often overlooked, hidden liability within a lease document can also have consequences. In the ever-changing economy, I frequently see organizations fall into a common real estate trap when they lose sight of financial impact, and make hasty, simple decisions based on landlord direction and lack of leverage.
Are you approaching your next move or occupancy decision? Below, I discuss a few tips to engaging in more strategic negotiations, plus insight into why working with a tenant representation advisor will save you money in the long run.
You might be shaking your head in disagreement (I get that), but please read on. In addition to bottom line dollars, there are other avenues of liability and flexibility that are addressed. In an age where business can change overnight (expand, contract or merge), flexibility within real estate situations are increasingly important.
Negotiation 101: Keys to Success
You can set yourself up for successful negotiation by being proactive, whether you are facing relocation or staying in your current asset. There are two keys to getting what you want: time and leverage. Here’s why.
- Time: If your lease is expiring in six months (and you haven’t engaged the landlord), you’re in a tough spot. At JLL, we involve the landlord no less than a year in advance of expiration. From the landlord’s perspective, he or she hopes to keep current, paying tenants in place. This means no down time (or lost rent) between tenants, no significant capital requirements by a new tenant as an enticement to lease, and no additional costs associated with a new transaction. Therefore, most landlords are open to and appreciative of early negotiations.
- Leverage: In anything, gaining leverage is critical to negotiation. Begin by identifying other alternatives. Even if your business has no desire to move, competitive alternatives will provide a measuring stick or bar for the current situation. Often inclusive of free rent, new finishes (carpet, those gleaming wood floors or that restaurant-style break area your employees desire) and below-market rents, the overall transaction structure could be very compelling.
Advantages of Working with a JLL Broker
Landlords prefer to negotiate with a company contact—not a tenant advisor. Know why? It’s simple: In most cases, tenant representation advisors are able to find areas of leverage, and utilize market knowledge to swing negotiations in the tenant’s favor.
Hiring an advisor will work to your advantage in more than one way:
1. Your advisor knows the market. Your advisor should have experience within the market you occupy and familiarity with the economics of other recent transactions. If overall rents or operating expenses aren’t in line with the “market,” then he or she can make a case for economic savings. More so, your advisor might have specific knowledge of your current landlord’s situation (i.e. perhaps they are going through a refinance and need your tenancy intact to execute, or maybe they are looking to sell all of their assets and your lease would have a substantial impact on the valuation of their disposition). In any event, these are opportunities to leverage and drive effectiveness for your business.
2. Advisors seek flexibility. Many businesses are growing rapidly, while others are scaling back for an increase in telecommuting employees. Whatever the case, building flexibility into a lease is more important than ever. Your advisor can ensure the proper rights (expansion, contraction or termination within a lease) are included in the new lease document, providing ultimate flexibility.
3. Advisors are proactive. A broker can help you to stay one step ahead. The expert knows what to look for to help you cut costs, long before you sign. Beyond the rent, operating expenses, taxes and utilities, your broker will ensure certain expenses/exposures are capped in advance. For example,perhaps you have exposure to any HVAC repairs/replacement without a “cap,” and the landlord can pass those costs through to you. We peel back the layers of the lease onion to make sure hidden costs are not going to hit your expense statements while you’re in a leasehold interest.
4. Advisors give you the gift of time. Having a real-time pulse on your particular market is hard work. Understanding the soft spots within a changing real estate market and staying up-to-date with building vacancies/activities is a full-time job. With an advisor, you can redirect your energy and keep working your “real day job.” It’s no different than hiring an accounting firm to most-effectively take care of your taxes. This is our day job and we take pride in solidifying our client’s occupancy solutions.
Are you confident that your lease is favorable to your business?
JLL suggests doing periodic reviews to ensure all lease terms are in line with market conditions. Need help getting started? I’d be happy to abstract/analyze your lease compared to the current market and provide insight into potential opportunities or issues. Please feel free to contact me for more information.
Image credit: Chris Potter, Flickr Creative Commons
About the Author
Collin Wheeler is a Vice President for JLL in the Columbus office. He specializes in providing strategic corporate real estate advisory and representation services. His exceptional finance and strategic transaction structuring background enable him to cost-effectively implement clients’ goals and objectives.