commercial real estate: in focus
HUGGED YOUR LANDLORD LATELY?

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Have you hugged your landlord lately? Ever? It might be time. The currentchill in the leasing market gives tenants a fair amount of leverage in negotiating favorable lease extensions right now. No matter how far out the expiration date is. In fact, this conversation should occur when a lease term is years away under any market conditions rather than when the expiration date is looming and there is the the added threat of losing your address.

So go hug your landlord. But before you go all touchy-feely, go prepared. There some things you should know before you play your hand to keep the upper hand.

Now is the best time

If your building has a mortgage coming due within a relatively short period of time—within two to three years—the owner will be concerned about making sure the building is fully occupied with long-term leases in place to secure favorable refinancing terms. If a tenant has three years or less left on its lease, the landlord likely will be very interested in talking about a lease renewal well before that three years is up.

Learn what the overall lease rollover situation in your building is. The more leases there are rolling over within a short period of time, the more anxious your landlord will be to negotiate renewals and extensions to maintain occupancy. Landlords need bargaining chips too and, if a building has a substantial amount of vacancy, a significant amount of leverage is lost when it comes to refinancing the mortgage.

It is advantageous for a business owner/tenant—or savvy real estate broker on your behalf—to lock in lease extension terms at current market rates. Landlords are often more receptive to retaining a tenant—even with the knowledge that rental rates surely will rise—than having to face leasing space in some future unknown market.

Know your landlord’s mortgage terms

Analyze and understand the loan structure on your building. Mortgage financing is one of the key factors affecting rental rates.Be aware that in nearly alllease negotiations between landlords and tenants there is the specter of apowerful third-party at the negotiating table: the lender. Why? Leases in place are the single most important factor in assessing a building’s value.And leases determine the amount of money the lender is willing to lend on that property.

More is more when it comes to rent

The higher the rent, the happier the landlord.But higher rents can still work to your advantage if you’re willing to pay to receive significant concessions in the way of work allowances, improvements, free rent, or other amenities not standard in your building lease. You may be able to negotiate valuable upfront concessions in exchange for a modest rent rateincrease over the renewed lease term. In the eyes of a lender, higher rental rates increase the value of the building and often allow a landlord to receive higher mortgage proceeds in the refinance. And once the refinance is in place, there will be capital for the landlord to pay for your improvements.

Simply put, a building with a high rent roll is far more valuable than a building with a lower rent roll.

Rent, time, and money motivate

In addition to rent rolls, term-length of leases and tenants’ credit worthiness are also critical factors in determining the value of a building. Lenders don’t like surprises; they prefer longer-term leases with credit worthy tenants for obvious reasons. Landlords need to predict future cash flows with a high degree of certainty to their lenders.

While credit worthiness enhances desirability, little or no credit is not always a deal breaker. If you have a good payment history on your lease, that may be enough to satisfy a lender. A substantial security deposit can also help overcome low or no credit.

Size

It matters. The more space you occupy, the more important your tenancy is to yourlandlord. Use it to your advantage.

Add it all up

Basically, you are either paying market rate, above, or below. If you are above market rent,yourlandlord may be willing to consider reducing your current rent in exchange for a long-term lease extension. If you are paying below-market rent,your landlord may be willing to consider a long-term extension with more favorable terms in other ways in exchange for an immediate increase in the rent. Either way, you have bargaining power with your landlord.

It should be noted that a rent reduction may require the approval of the existing lender. Increasing rent does not. And if you are paying current market rent, it’s just as important to negotiate a lease extension now while the market favors tenants over landlords.

So go hug your landlord today.
Peter Shakalis is Managing Director, Lee & Associates NYC
pshakalis@lee-associates.com
©2012 NEOCORP MEDIA





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