Wharton Property Advisors, Inc.
Effective Strategies for a Lease Renegotiation

Given the rapid rise in NYC office rents, it is becoming increasingly important that companies follow a disciplined and thoughtful strategy when their lease comes due. By taking a few simple steps tenants can best position themselves for a favorable outcome with their current landlord while also considering potential alternatives. The ability to renegotiate a lease depends on many factors: timing of the current lease, condition of your premises, your current space requirements and the availability of space in your building, among others. It is not unusual for a tenant to slash a significant percentage off a landlord’s asking rent by following the right strategy.

Conventional wisdom is that the landlord has the upper hand in today’s market. While that may be the case in many circumstances, this underscores the importance of careful preparation and full examination of all available options.

If you are a candidate for renegotiation below are some pointers on how to get the best rate.

• Begin early: Landlords know that it can take 12 months to negotiate and implement a tenant relocation. Accordingly, when a tenant starts renewal negotiations with only a few months remaining on its lease, it indicates to the landlord that renewal may be its only real option. A “captive” tenant that starts its search too late has little negotiating leverage since it lacks the flexibility to shift gears and move elsewhere.
• Determine the value of your space: The market value of any office space is a function of two factors— the condition of the space and net effective rental rates both in the building and the neighborhood in general. What rent, free rent and work allowances are being given in the building? How much work does your space need for an outside tenant? The value of the space to the landlord is the critical factor: what net effective rent could the landlord expect to realize if the space were vacant and had to be rented to an outside tenant? For example, if the market dictates a landlord contribution of $20 psf toward tenant improvements, and a renewal would not require this expense, the rent for a ten-year renewal should be approximately $2 psf lower than the market rent.
• Act as though you are prepared to move: A competitive environment is crucial to an effective negotiation. The landlord will not negotiate seriously unless it is made clear that the tenant can, and might, relocate. Even when the tenant has absolutely no inclination to relocate, it is imperative to identify several properties that are viable alternatives and to advise the landlord of these competing spaces.
• Watch the Escalations: Tenants at the tail end of a long term lease are frequently assessed significant escalation charges for operating expenses, real estate taxes and electric. These charges should be carefully scrutinized by an experienced agent. There are often inaccuracies / overcharges which can be rectified at the end of the lease term when a new lease is being considered.
• Be open minded: The landscape of NYC is changing. For emerging or non-profit businesses, the cost of NYC office space is daunting. While the space is not being given away, there are interesting options for space in what were, for many, considered unattractive areas, such as the West 30’s, Times Square, Tribeca and Harlem. The open minded tenant may be pleasantly surprised by what is available.
• Engage a real estate advisor to negotiate with the landlord: There is an old saying that “a lawyer who represents himself has a fool for a client”. The same could be said for an office tenant who attempts to represent himself in negotiations with a savvy landlord. The mere introduction of an experienced real estate advisor puts the landlord on notice that market realities will not be ignored and that the tenant will be professionally represented in all aspects of the upcoming negotiation. This will immediately increase a tenant’s negotiating leverage.