The Renewal Process

“The renewal process should be undertaken in a similar manner to
a relocation exercise which a tenant would normally incur
if they decide to move”.

 

 

Landlord Trap | Unlevel Playing Field

  1. Landlord’s have access to market knowledge
  2. Landlord’s claim renewals alleviate moving and related costs
  3. Landlord’s fail to tell tenant’s that vacancy costs them money

Tenant Oversight

  1. Tenant’s fail to take advantage of opportunities presented from the renewal process
  2. Tenant’s need to understand Landlord’s considerations – i.e. required returns
  3. Landlord’s generally budget/assume agents commission in every deal
  4. Timing: Start renewal process early, 1-2 years prior to lease expiry

Define The Objectives

  1. Rental Rate- current market value
  2. Alternative Options
  3. Building/maintenance operational issues to existing facility/premises
  4. Renovation/ Upgrades
  5. Signage Opportunity
  6. Landlord must be aware there are credible options available

Commercial Real Estate Professional's Advantage

  1. Knowledge of the players
  2. Economics of the deal
  3. Landlord’s tactics
  4. Understanding Landlord’s vulnerability


Case Study: Renewal Process
Space: 50,000 RSF
Market Rental Rate: $27/RSF net ($45/RSF gross)
Tenant’s Renewal Rental Rate: $30/RSF net ($48/RSF gross)
Operating Expenses and Taxes: $18/RSF ($15 cost to landlord during down time)
Landlord Debt Service: $12/RSF
Lease Term: 10 years
Tenant Inducement: $35/RSF
Marketing Cost: $8/RSF
Down Time (Marketing and Build-Out): 12 months

 

Revenue and Cost Components Landlord Revenue (Costs) with Renewal Landlord Revenue (Costs) with New Tenant
Market Rent ($27/RSF)   $13,500,000
Renewal Rent ($30/RSF) $15,000,000  
Down Time (12 months)    
Lost Net Rent Revenue
  (1,350,000)
Debt Service   (600,000)
Operating Expenses & Taxes   (750,000)
Workletter Value ($35/RSF)   (1,750,000)
Marketing   (400,000)
Total Revenue $15,000,000 $8,650,000
 
Benefit Available to Tenant at Landlord’s Break-Even: $6,350,000