How to Renegotiate Your Lease

Few industries have been unscathed by the economic downturn, including the real estate industry. This financial crisis has resulted in increased vacancy rates in Class A office buildings in Manhattan to a level not seen since November 2004, according to a report issued by Colliers ABR in January 2009. Vacancy rates in Class B office buildings have been rising at a similar pace. But it’s not all bad news. The record vacancy rates throughout the tri-state area have turned commercial real estate into a tenant’s market. Whether the recession has left your business in need of a downsize, or in a position of growth, there are several steps you can take to save cash and take advantage of the commercial the real estate conditions.

Your Lease Is Expiring? Lucky You.
If your company’s commercial lease is due to expire in the next twelve months or sooner, you may be in the unique position to take advantage of the current economic climate by negotiating new lease terms in the most tenant-friendly commercial market New York has seen in quite some time. Landlords are interested in retaining solid tenants with a good track record, and attracting new tenants, as well. Your company’s current landlord may be willing to offer rent reductions and rent concessions in order to entice your company to renew or extend its current lease. By beginning discussions early with your landlord, you will have ample opportunity to negotiate the most favorable terms for your company and address any concerns you may have, such as a reduction in square footage, rent concessions, or rent reduction. At the same time, you can explore the possibility of relocation to another building and get a sense of the deals that are out there. To make sure you are negotiating the most favorable lease terms, explore all the options that may be available in other suitable buildings. Also, speak to a reputable and experienced real estate broker before signing a new lease. Also, landlords who purchased their buildings at inflated prices over the past few years may be especially anxious to sign up new tenants in order to fill open space and increase their income. Whether or not you’re planning to leave your current space, this will help you to acquire the information necessary to take the best strategic position in negotiating with your current landlord or with a possible new landlord.

The market for office space does appear to be declining at a rapid pace, and many tenants may be inclined to wait until the market bottoms out before negotiating a new lease. Waiting it out may prove lucrative to those who have that luxury. But tenants who need to renegotiate now should keep in mind that while the average asking prices may continue to decline, potential tenants may be able to negotiate a reduced rental rate now that takes the downward trend into account.

Landlord Concessions
Your business may be slowing down, or your business may be booming, despite the state of the economy. Either way, you can benefit from the change in the market. Landlords may be willing to offer greater concessions to new tenants.

If you’re happy with your current location and your business is expanding, check to see how your neighbors are doing. If your business is doing well, your landlord may be inclined to assist you in expanding into neighboring spaces, and may be willing to contribute toward the build-out of the expanded offices. Landlords may be willing to do what is necessary to keep a good tenant, even if it means offering neighboring space at a reduced rental rate or restructuring the rent for the entire expanded office space.

Is Your Business Suffering? So is Your Landlord’s—Take Advantage
In better times, when a tenant vacated, the burden of locating new tenants, at possibly higher rental rates, was not as heavy, but this is no longer the case. In this market, your landlord may find himself in the difficult position of finding a replacement tenant in a reasonable period of time who is willing to pay at least the rent previously paid by your company. In addition, the landlord may incur significant costs in the form of rent reductions, rent abatements (i.e., free rent), rent concessions, and tenant allowances for build-out in order to induce a new tenant to lease space in the building. If your business is faced with uncertain times such that you are or may be unable to continue to afford the current rental payments, recognizing that the landlord will also be placed in the unfortunate position of locating a new tenant, you may find the landlord sympathetic to your company’s needs. Your landlord may be willing to agree to a temporary or permanent rent reduction, or a temporary rent abatement under your current lease, if you explain your situation to him. Keep in mind that your landlord may ask for evidence to prove to him that you have a legitimate need for a rent reduction. However, even deferring some of the rent and any increases during the lease term may get your company through the tough economic climate. The downside is that, down the line, you will still be responsible for paying the rent you have managed to defer. If your business is currently hurting, but you see a light at the end of the tunnel, this option can give you the time you need to rebuild your cash reserves and reinvest in your business.