As we kick off 2023 with economic anxiety, the New York City commercial real estate market faces uncertainty. Whether you’re a hedge fund, law firm, or startup, you may wind up in a situation where you have to manage costs, particularly if your lease is about to expire. One thing you should consider is renegotiating your commercial lease terms.
Renegotiating your lease differs from renewing your lease and receiving a lease renewal agreement. Moreover, you’re not renegotiating for a brand-new lease. Instead, you will renegotiate specific parameters and receive a lease extension agreement.
On the one hand, as your lease nears expiration, you can consider relocating and upgrading your office or neighborhood. However, it can become a costly and disruptive headache for your business, especially in an uncertain economic environment.
Remaining in your existing location is always an easier option, especially if you’re happy with where you are. If it becomes too expensive and you want to look for ways to manage and potentially reduce your real estate costs, understanding the ins and outs of renegotiating your commercial lease can be very valuable.
Renegotiating Your Commercial Lease- Why?
You may want to renegotiate your commercial lease with your existing landlord for several reasons. Perhaps you want to contain costs by renegotiating specific lease terms, such as the base rent and annual rent escalations. Maybe you want your landlord to improve your space with a new paint job, flooring, or more.
It could involve outright requesting a rent reduction, rent abatement, or a change to terms, such as improvements to the existing space and the landlord building to a cap or a different lease length. You could also ask your landlord to provide some free rent as part of the renewal, negotiate for expansion space within the building, or relocate to a more desirable space within the building.
Commonly, the most opportune times to renegotiate are about 6 months before lease expiration or longer if the space is larger than 5,000 Rentable Square Feet.
If you wait too long, you gamble with not having time to locate, negotiate for, and build out a new space before your current lease expires. Then you run the dreaded risk of holdover penalties.
Although if you’re hesitant to renegotiate your lease because of your landlord’s potential reaction, consider that market conditions affect them too. Your landlord, above all, wants their building to generate a predictable revenue stream so they can pay operating expenses, taxes, and mortgage expenses.
They achieve this objective by leasing vacant space and signing renewals with existing tenants. Vacancy rates have climbed considerably since early 2020, and tenants are now in a position to negotiate extremely favorable lease renewal terms.
Tips for Renegotiating Your Commercial Lease
Remember that a lease renegotiation is a critical transaction for your company. Real estate costs are the single greatest expense for companies following payroll.
Before you or your broker submit a lease renewal proposal, be sure you have a plan, your details in order, and a genuine interest in meeting halfway. Moreover, be timely, confident, and professional.
Be sure you also have a Plan B and C and expect a lot of back and forth.
Consider the following tips for renegotiating your commercial lease with your landlord.
Don’t Wait Around
It’s best to start planning your search for commercial real estate anywhere from six months to a year before your lease expires. Renegotiating your lease works similarly.
Most commercial buildings in New York City have institutional owners and several layers of management. Thus, the negotiating process can take months. There are usually a series of offers and counter offers.
Don’t expect to reach an agreement in a twenty-minute conversation.
If you don’t have an experienced commercial realtor representing you in negotiations with your landlord, make it a point to study the market extensively to understand what other landlords are offering. However, because the NYC market is exceedingly complex, working with a commercial realtor with extensive tenant representation experience and knowledge of New York City commercial real estate is strongly advised.
While nothing can replace an in-person meeting or face-to-face interactions, email is an essential tool to use when renegotiating a lease. Texting is too informal, and in-person conversations do not show a paper trail as emails do.
Meetings only become necessary if the parties can’t agree on terms after a few rounds and if there are open issues.
Be Confident and Respectful
Always approach your landlord or managing agent confidently and professionally, and try to understand their point of view and motivation. By coming in with this approach, they will see you as someone with a genuine interest in finding a solution that works for everyone.
Do Your Homework and Have Concrete Requests
Whether you or your broker approach your landlord to renegotiate your commercial lease terms, understand that there are protocols. Either you or your broker can submit a proposal in writing. Of course, working with a broker is the safer and smarter route to go.
If you submit the lease renewal proposal yourself, be careful not to omit terms or describe them in an ambiguous manner. Don’t waste your landlord’s time if you go in with vague questions or requests or if you’re unsure of exactly what you want.
Be Thorough and Detailed
This tip is an extension of the previous one. Always be as thorough and detailed as possible when justifying your renegotiation request.
If comparable tenants are getting better lease terms, prove it and show the data. An advantage of having a broker representing you is that they will have their hands on this info. They will know what other owners are offering, including the specifics of other deals in your building or nearby similar buildings, and can negotiate accordingly.
Moreover, if your business hits an economic snag, explain it to your landlord and show the evidence with your financial statements.
Have a Plan B and C
Renegotiating your lease is a process. There can be several rounds of offer and counter offer that take months. The negotiation can be a cliffhanger, and you may not know whether you are staying or going until the last moment before you meet halfway and agree to a deal. If your landlord denies your request to renegotiate, be sure you have a Plan B or a Plan C.
Working with a commercial broker during renegotiation and before is also a wise decision. Use all the guidance you can, especially from an expert on the New York City commercial real estate market who understands what tenants need and how landlords think.
The Key Takeaway
Real estate markets change, as do business conditions. Nobody ever signs a commercial lease with the anticipation of renegotiating. But things can happen that put you in a situation where you may consider doing so.
If you’re looking to renegotiate your lease terms, be sure it’s the right time. Before you have a discussion with your landlord, do your homework. Understand what other landlords are offering and pricing in your neighborhood. Prove that you have thoroughly researched the market.
Otherwise, your landlord will have the upper hand and make mincemeat out of you.
If you do not have the time to educate yourself, hire a commercial broker who puts your best interests forward. Knowledge is power. Plus, your landlord will almost certainly have a broker looking after their interests.
So why shouldn’t you?