Chris Carmen / October 3, 2019
Landlords make their biggest profits on the renewal of existing tenant leases. Ironically, most Commercial Tenants believe that during their preceding lease terms, they’ve built a ‘best buddies’ relationship with their Landlords and assume incorrectly their landlord will be fair when it’s time to renew its office lease. So they start the renewal process too late and leaving little time for the market research and renewal negotiations. This is the tenants’ first step into The Landlord’s Trap.
Further, commercial landlords 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.
The second and most common type of Captive Tenant is the one that fails to plan far enough in advance of the lease expiration. By the nature of not having enough time to plan, research options, tour alternative properties, and procure competitive lease proposals becomes captive because it can’t realistically execute these tasks to even consider an office move. This Tenant assumes, often incorrectly, that its Landlord will be nice at Renewal Time. This type of Tenant often believes 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, such as carpet, paint, and maybe construction of a private office.
Then you get your first surprise. The Landlord’s first renewal rent proposal is higher than you had hoped…probably a lot higher; the reason for the unexpectedly high rent proposal they say is the cost of the tenant improvements you requested is a shock to everyone. Meanwhile, the clock continues to tick, but no alarms go off. You’re unaware of the loss of valuable research time to identify alternative building options in case the negotiation ends up not being quite as friendly as you had anticipated. Your Property Manager wants to get another bid from a different General Contractor, but he’s on vacation for two weeks…and the clock is ticking.
Maybe the Landlord isn’t quite so cooperative about the expansion space you need or to offer other 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 stuck between the proverbial rock and a hard place. There’s not enough time to investigate if a better alternative is available to relocate the office to a new location.
A lot of Tenants, including Fortune 500 Companies and national professional firms, too often end up having to choke down bad lease renewal deals that are far in excess of “market”. 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 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 captive simply because it simply doesn’t have enough time to deploy its ultimate weapon in the lease renewal arsenal…the ability to “walk”….relocating to another location.
Further, the Landlord can turn up the heat, making the lease negotiation process feel like a hot-yoga class, by actively marketing the Tenant’s space and showing the space to Prospective New Tenants. The Renewing Tenant gets pretty uncomfortable watching unfamiliar folks sniffing around its space.
It may sound simple, but this strategy works for Landlords and their Leasing Agents. Of course, they get lots of practice while working on tenant lease renewals every day compared to renewing tenants, who renew leases roughly every 3-10 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 adding a Tenant’s Agent to your team well in advance of the lease expiration, the Tenant clearly tips its hand to the Landlord that they are not 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 the mover. Renewing Tenants don’t seem to understand that their desire to be nice and agreeable will likely cost them years of higher rents by not having a true advocate on their team, particularly, 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, less than 8-9 months in advance of the lease expiration, 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-sophisticated, but nice Renewing Tenants getting excessive and above market rental rates 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 CARMEN to catch up, you might like to see our Office Relocation Timeline, 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 procure New Tenants, your Landlord has to at least 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…and the Landlord knows this.
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 avoid 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. Hiring a real estate professional that specializes in representing tenants, a/k/a a Tenant Broker, will be like adding the proverbial “Atomic Bomb” in the lease negotiation. Engage a 100% Tenant Representative to advocate hard for your interests. But to be clear: Avoid traditional Commercial Brokers, the ones whose companies have signs in front of buildings and list Landlords’ buildings for lease. They are the ones that want to represent you, as the tenant, but are also the ones who’s firms are the leasing agents for the landlord’s building, creating a severe conflicts of interest. Besides, they only do Tenant Representation part-time.
On the other hand, at CARMEN Commercial Real Estate we perform 100% Tenant Representation full-time, all day, every day.
Except in rare situations, your Landlord pays its listing broker to lease the building and renew tenants’ leases. When you hire a Tenant Broker to represent your business, it will collect a portion of the fee the landlord pays to its broker. Therefore, it usually doesn’t cost the tenant anything to hire a Tenant Broker to act on your behalf 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 only makes sense to secure your own professional representation.
No More Starbucks & Krispy Kreme
Leverage Levels the Playing Field
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 CARMEN or any of our 100% Tenant Rep accompanying you to the lease renewal party. The last thing the landlord wants is for you to be equipped with a professional that understands the current market and provide you with at least as much expertise as is sitting on the landlord’s side of the negotiating table.
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 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 CARMEN 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.
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 Broker to your team, you will fundamentally change the Landlord’s approach to your Lease Renewal. As a 100% Tenant’s Agent, we minimize the profits that your Landlord makes from 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: Chris Carmen at 317.848.0900 or email me at firstname.lastname@example.org 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.
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