Renewals – What to Expect

If your lease is nearing the end and your office is in the Washington area, you’ve probably heard from a whole host of real estate brokers about how much money they can save you if you were to renew your lease. Some, who don’t yet even know the details of your lease, might even promise a windfall of savings before your current lease even expires. So, do these promises of a pot of gold at the end of the negotiating rainbow always come true? How do you separate the possibly empty promises from the solid advice your broker should be offering you? As with many things in life, the truth can only be revealed after a careful study of your specific situation.

The fact is that many brokers promise potential clients savings upon a renewal because of the assumption that after a tenant has been in their space for 5-10 years, their rent has often escalated above market, when including escalations and increases in taxes and operating expenses.  So promises of savings are in many cases a safe bet, but not all. In order to understand the leverage you have in a renewal situation, your broker should go beyond endeavoring to understand your business and goals.   They need to understand your landlord’s motivations and position in the building. For instance, a landlord that is looking to own your building long-term will be interested more often than not in stability and might be willing to reduce your rent early in return for a long term commitment.  However a landlord looking to potentially sell the building might be more interested in keeping current cash flow as high as possible and would be more willing to take a chance of losing you rather than sign you to a new deal at a low rent that might send a message to potential buyers that a seller doesn’t want to send. Also, is your building full and does it have other tenants looking to expand? If so, your landlord might not be willing to drop your rent so fast if they think other tenants in the building are ready to snap up your space.

There are so many factors that influence a tenant’s leverage in negotiating a renewal beyond your strength and track record as a tenant.  It is important therefore to retain a broker that not only demonstrates a knowledge of the market and a willingness to roll up their sleeves to learn about your business, but also one that has a good understanding of your landlord’s goals and position in the building.    With a complete understanding of the overall picture, you can design a strategy that will leave you in the best position to find that pot of gold.

Marc Shandler