The calculus behind renewing your lease

I frequently speak with tenants that are approaching their lease expiration to discuss their plans for post-expiration. The usual refrain is some variation of:

“We have a renewal option in our lease… we’ll probably just exercise it.”

“We’ll work something out with the landlord since we’re not interested in moving.”

“The landlord has already approached us with a great deal.”

Here are three reasons why that “good deal” could probably be a whole lot better:

1) The landlord is banking on your inertia. Most renewal language reads something like, “the renewal rate shall be at fair market, but not less than what the tenant is currently paying.” Rental rates typically escalate through a lease term, compounding at approximately 3% annually. Even in the frothiest conditions, chances are the lease rate will be above market by the end of the lease term, and landlords bank on this when they use this renewal language.

2) It’s expensive for the landlord to carry vacant space. Your rent is covering his debt service, taxes, operating expenses, and marketing costs (in addition to some profit.) Even in the best market, he is anticipating at least six months before he can start collecting rent from another tenant.

3) Your space works for you, but probably not the next guy. The landlord won’t have to retrofit the space for another operation. It’s rare that an incoming tenant can use the space exactly as you left it. Most likely, there will be architecture drawings, demolition and construction that needs to be completed in order to make the space suitable for the next tenant.

Yes, there is tremendous cost avoidance to staying in place, both in actual dollars associated with moving and the “brain damage” that comes with disrupting the operation. But the landlord has plenty of exposure too. Make sure you’re doing the calculus for both sides of the negotiating table before simply settling on the first offer the landlord makes.

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