Tenants should view their lease expiration as an opportunity to restructure their present office facility to address new priorities and changes to their business. One very important consideration, however, is to begin to focus on the lease expiration well in advance, and allow sufficient time for the many aspects and details of the renewal or relocation process to unfold, especially time for unexpected issues that can arise at the last minute.
By Peter Shakalis
The first step of course is to hire a competent broker to assist in the process. This costs the tenant absolutely nothing and avails the tenant of the information they will need to evaluate space alternatives and make intelligent decisions.
The process of renewal or relocation varies according to the amount of space the tenant requires. Large users should begin the process several years in advance while smaller users may need as little as six months.
When insurmountable issues arise at the end of a negotiation which causes the deal to fall through, tenants that have not anticipated this possibility must again begin the process of inspecting new locations and buildings, do preliminary architectural plans, prepare financial analyses, and submit and negotiate proposals.
A problem arises when the time spent looking for a new deal brings the tenant closer to its lease expiration date and the chance that it will be a ‘hold-over’ tenant in its space. “Hold-over” tenants can be subject to stiff penalties and damages from landlords if they cannot vacate their space when their lease expires.
Landlords negotiating with a tenant coming into their building know that if the prospective tenant has a lease coming due shortly and no back-up alternative, it has ceded much of its leverage in the negotiation. The tenant in this situation is in the position of either capitulating to the landlord’s negotiating position or facing the prospect of becoming a hold-over. Leverage on the landlord’s part in this situation translates into less flexibility in many areas of the negotiation such as price, landlord work contribution, and lease clauses, all of which can have an important impact on the tenant.
A back-up alternative therefore makes it easier for the tenant to re-consider its original choice and move onto a better opportunity if it chooses. It also lets the prospective landlord know that the tenant is not captive to the landlord’s deal as it nears its expiration date.
A tenant is a valuable commodity to a landlord in good times or bad times. Tenants are revenue streams for owners while vacancies cost landlords money. Nevertheless a tenant must dispassionately put themselves “in play” to level the playing field when negotiating with owners. Without alternatives tenants are at a disadvantage. Deals are aborted with great frequency and for a variety of reasons, without a back-up plan the tenant may give up a precious advantage – TIME.
(James Murphy, Managing Director of investment Sales at Colliers International contributed to this article. James.murphy@colliers.com)
Peter Shakalis is a Director at Colliers International NY LLC
