How to Avoid Common Traps in Lease Renewal Negotiations!

Landlords prefer to deal directly with their tenants on lease renewals, by offering theoretical savings which might be passed along to the tenant. This is never a good idea for the tenant...Here are some of our favorite landlord tricks attempted during lease renewal negotiations:

Cutting out the brokers
It’s not solely about brokerage commissions.  Total brokerage commissions only amount to $2.50-3.00/sf per lease year (assuming a $50.00/sf rent).  If these costs were split 50/50 with the landlord, this would only be a discount of 2-3% off the landlord’s starting rent, which is something that any competent broker can negotiate.  Instead, the huge windfall for the landlord is having the tenant negotiate without an advisor, thereby missing many of the other most common leasing traps in renewal negotiations.

 

Providing a lease amendment
Rather than issue a new lease document, the landlord will claim that by providing a shorter, lease amendment to the existing lease, both parties will save on legal fees.  Unfortunately, any lease amendment will be subordinate to the preexisting lease document.  This shifts the negotiation’s focus away from the existing lease terms which are generally open to renegotiation.  Investing $5K on a capable real estate attorney would more than result in cost savings of that amount.

 

Keeping the base rent flat
Most landlords will propose a new base rent either similar to the existing amount or what seems to be reasonable increase over that amount.  On lease renewals, however, the landlord avoids many of the cost components of the base rent, such as tenant concessions (free rent and tenant improvements) which can comprise a huge portion of the base rent amount (12-15% of total rent cost) and brokerage commissions (see above).  Lease renewals should take into consideration these costs and either net out the cost or provide the concessions.

 

Keeping the real estate tax base constant
Many times, landlords try to retain the existing Tax (and Operating Expense) base years of the original lease document by issuing a lease amendment.  If the lease is over five years old, this means that accrued tax/operating escalations of anywhere from $5-15/sf will immediately accrue from day one of the renewal period.  Thus, these hidden escalations will offset any gains from a reduction in the base rent amount.

 

Proposing annually compounded rent increases
It is common practice today for landlords to propose a small percent increase in the base rent amount in lieu of an operating escalation. There are two problems with this calculation: Operating costs are only a small component of base rent, so an annual increase in the rental rate more than offsets any inflationary risk of the landlord.  Additionally, while 3% sounds relatively low, this number will increase the base rent substantially in years 5 and beyond.  Typically, this number is negotiable and something in the 2.25-2.50 range is generally obtainable.

 

Increasing the security deposit
Most landlords try to increase the security deposit to reflect an equivalent number of months of the higher rent amount.  We would argue that the tenants’ performance under the existing lease mitigates any future credit risk and without any free rent, tenant improvements or brokerage commissions there are no additional landlord costs to securitize.

Requesting a personal guarantee
If a landlord has not had a personal guarantee there is no basis for adding one.  Conversely, we would argue that if the tenant has been in good standing throughout the previous lease term, most ongoing landlord risk of default has been mitigated and this is no longer appropriate.