Renegotiating a Commercial Lease | 4 Requests to Always Make

A common refrain commercial real estate professionals hear from business owners is: when our business’s lease came up for renewal, we wanted to renegotiate, but we didn’t know what we should ask for. 

This is a completely understandable situation.  Businesses often feel that, because they’ve occupied a space for a while - as opposed to being new tenants - they don’t have the right to ask for a better deal during the renewal process. 

Renegotiating for better terms is something all businesses should do during a lease renewal, and in this article, we’ll discuss the following four requests every commercial tenant should make during this process.

●      Request 1: Tenant Improvements, Round Two

●      Request 2: Lowered Rent

●      Request 3: Rent Concessions

●      Request 4: New Base Year for Gross Leases

●      Final Thoughts

Request 1: Tenant Improvements, Round Two

Prior to signing an initial commercial lease, businesses typically receive a tenant improvement allowance from the landlord.  And, during the renewal process, many tenants deal with a “guilt factor,” thinking: well, the landlord gave us a substantial tenant improvement allowance initially, so I’d feel bad asking for another one now. 

At the conclusion of a commercial lease - especially a long-term one - your space is, at a minimum, in need of some repairs, and, if your operations have changed, potentially an entire overhaul.  As such, owners should always ask for a new tenant improvement allowance during the renegotiation process.

While landlords may be hesitant to offer an allowance larger than the initial one, tenants should take stock of their current space and what work is required, asking for an amount that at least covers these necessities.  And, if signing a long-term renewal, tenants likely have the renegotiation leverage to demand a substantial allowance, comparable to the one provided at the onset of the initial lease.

Local commercial real estate professionals can help you craft a renegotiation strategy to maximize allowances - need help finding reliable ones in your area? Drop us a note!

Request 2: Lowered Rent

Business owners may think, there’s no way my landlord will offer lower rent on a lease renewal.  But, changes in market dynamics can, in fact, create a situation in which tenants can successfully demand lowered rent for a new lease term. 

Especially in today’s crazy environment of COVID-19 remote work, commercial tenants have tremendous bargaining power when it comes to renegotiating for a lowered rent.  Where a market may have commanded top-tier rents pre-COVID, a mass exodus from office space to a remote-work environment has turned many of these environments upside-down. 

To position themselves for a successful rent renegotiation, businesses should have a solid grasp of local market dynamics and ensure they’re armed with relevant comps when meeting with their landlords.  This information can provide the key leverage necessary to make a landlord accept a proposal for lowered rent. 

Numerous considerations exist for commercial rent pricing, so please drop us a note for help with a market analysis and comps for renegotiation leverage.

Request 3: Rent Concessions

When a commercial tenant moves out, there’s often a significant gap until the next tenant occupies the property.  Between build-out requirements and business timelines, landlords cannot realistically expect to have a commercial tenant move out on a Friday and a new one move in the following Monday. 

This reality creates a cash-flow gap for landlords in between tenants - and provides leverage for a current tenant to request rent concessions during lease renewal negotiations. 

Put simply, it’s far easier and more cost-effective for a landlord to offer a current tenant concessions or a period of free rent rather than go through the hassle of finding a new tenant and building out the space to new specifications.  Recognizing this, businesses should always ask for rent concessions during the lease renegotiation period. 

Request 4: New Base Year for Gross Leases

If your business signed a long-term gross lease, there’s a good chance you’ve received a base-year escalation charge from your landlord.  And, not all commercial tenants realize they’re on the hook for these escalations until actually being charged. 

If you’re in this situation, requesting a new base year can significantly reduce the amount you’re charged in base-year escalations. 

In essence, a new base year means you shorten the length of time recoverable operating expenses have been allowed to grow, meaning you need to pay your landlord less in escalation charges each year. 

Interpreting the base-year escalation requirements of a gross lease can be particularly complicated, so please drop us a note for help understanding your current situation - and how you can renegotiate a better one!

Final Thoughts

Every landlord is in a different financial situation, and not all of them will be able to realistically offer the above concessions during a lease renegotiation.  But, for all tenants, you don’t lose anything by making these requests, and you potentially gain significant savings. 

Keeping this in mind, be sure to make the above requests during your next round of lease renegotiations!

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We recognize that, even after outlining the above information, tackling the challenges of a commercial lease renegotiation can seem daunting.   

That’s why we’re here to help.  The Pocket Broker team lives and breathes commercial real estate, so drop us a note to see how we can help you achieve your unique objectives!