Based on recessionary trends and their impact on the office market, it's clear that we have reached one of the lower, if not the lowest, points in the cycle. Accordingly, many corporate space users are recognizing this as an opportune time to extend and renew existing leases. Across the board, service providers are touting the benefits of early renewals and restructures. Even some building owners, eager to retain tenancy, are approaching existing tenants to initiate discussions.
If you are a corporate space user looking to cut costs, this is good news. But, before you take action, be sure you aren't ill-advisedly jumping on the bandwagon. What if you need to maintain flexibility? Or maybe your current space is no longer functional? How well do you know your submarket? If rents are still trending down, restructuring an existing lease now for a longer term may not be your best option. Most important, do you truly know your business' future—are you in a position to forecast long-term space needs? Ultimately, the feasibility of a restructure is determined case-by-case.
When Is Lease Restructure Viable?
Restructuring an existing lease makes sense only when it is economically beneficial over the long term. Factors that would lead to this conclusion include: the space in question is a core asset or you are planning a large capital expenditure. Additionally, you must be sure that restructuring the lease would fit into your overall business objectives. But economic soundness doesn't mean the owner will buy in. You must be prepared to do your homework and leverage your standing.
Know the Submarket
There is no doubt that the building owner knows what's going on in the market. So should you. Even if you have no intention of taking different space, you should examine your options, and it doesn't hurt your negotiating position for the owner to hear that you were looking. Where is your specific submarket in the real estate cycle? Are rents trending up or down? How about vacancy and new construction?
Know the Building
Your building's micromarket will either fly in the face of submarket conditions or further reinforce their impact. For instance, regardless of market status, if the building is 95% leased with the majority of tenants in 10-to-15-year terms, your negotiating leverage is significantly reduced. Conversely, a 70% leased building with expiring leases puts your standing in a more favorable light.
Know the Owner
Whether your building is owned by a REIT or is privately held can impact your negotiating strategy. Does the owner have debt on the building and when does it mature? What is ownership's history—does it buy and hold or trade assets frequently? Answers to these questions could tell you if timing is a source of leverage in your negotiation.
What Are Effective Negotiating Strategies?
In timing your negotiation, make good use of the information you've learned. Try to match your negotiating strategy to fit your owner's specific needs—whether it is for continuation of cash flow, long-term asset value or refinancing of existing debt.
Leverage Credit & Relationship
Post dot-com collapse, owners are much more sensitive to credit. If you have good credit or a good-credit history, be sure to leverage the valuation benefits and minimization of risk. The owner is very aware that building valuation is based on income stream and the quality of tenants.
Appeal to the Owner's Pocketbook
Provide an empirical analysis of the costs of acquiring a new tenant at market rates versus restructuring and renewing your existing lease. By building a revenue model that shows the owner's potential return over a discrete period (six to 10 years), you can show how the owner can achieve the same total revenue and eliminate risk by retaining your tenancy through a restructure at a reduced rate.
For you, as the tenant, the benefits of a successful lease restructure can include: improved economics, additional capital for improvements, increased flexibility in lease term (possibly cancellation rights), and expansion and contraction opportunities. On the whole, a wisely crafted restructure can be a win-win for both parties: increasing long-term asset value and stabilizing future rent flow for the owner while generating savings for you.
Cresa Partners LLC vice chairman and Think Tank member Gerald A. Porter has more than 24 years of experience in the corporate real estate industry. He is based in Los Angeles .
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