Dear Business Owner,
No Pain Chiropractor’s 1,500 square foot retail lease is up for renewal. The big question for No Pain is, “Do I stay, or do I go?”
Business is booming and the lease amendment details, like a higher lease rate and no tenant improvements, had been pushed to the back burner until the last minute. By then No Pain Chiropractor was in a corner. Sam, the business owner had two choices: sign the amendment or try to relocate in two weeks. Sam weighs his options. Overwhelmed by the process, he signs the renewal instead of the risk of losing business while relocating (before speaking with a tenant rep).
Three years later No Pain Chiropractor’s lease is, again, up for renewal. Sam discovered it costs him nothing to hire a tenant rep. Sam and his tenant rep discussed No Pain’s options:
- Accept the proposal with, yet another, above market rent increase,
- Stay and try to renegotiate the proposed lease terms, or
- Relocate nearby at a lower lease rate.
The tenant rep explained, for No Pain to secure the best renewal rate from their existing landlord, they must find another location with favorable lease terms that Sam will seriously consider as a new office location. The tenant rep presents the new lease opportunity to the current landlord to see if it will be match the deal up the street or be willing to resign a long term tenant.
No Pain Chiropractor’s Current Location
- No Pain’s office, located within a retail center, commands higher rents than an office location.
- The retail lease rate is high for the area based on current market conditions.
- The suite, thirty years old, is dated and flows poorly for business. It desperately needs a remodel.
- The location of the suite in the strip center is behind a large pillar and has minimal visibility.
Relocation Opportunity
No Pain found office space a half a mile north of their current retail office. The close proximity ensures Sam can retain most of his patient base. This office complex has prominent signage and is 300 square feet larger than the existing retail space. The larger space is less rent per month and the new landlord agrees to a turnkey suite with five months of free rent.
Industry Lingo – turnkey means the landlord pays for all agreed upon suite renovations.
In relocating, No Pain gets a newly renovated suite and can expand their business at a reduced monthly rent. The tenant incentive package, free rent and a remodel of the suite, totals over $55,000.00.
The Conflict
Even with the substantial savings, No Pain is reluctant to move.
Real Time Market Conditions reviewed by the Tenant Rep
Vacancy rates are low and office demand is high in Sam’s area of town. Without a signed lease, any qualified tenant may swoop in and secure a lease on Sam’s alternative office location. Sam now has only two months remaining on his existing lease. If Sam gets into a holdover situation, having to stay at his current location until his new location is ready for move-in, his lease states the rent will increase 200%! The tenant improvements on the new location will take up to three months after a lease is signed. Sam may not have time to relocate.
The Tenant Rep Set Up
“Sam,” the tenant rep sit down in Sam’s office. “I know you don’t want to move, yet the other opportunity financially meets your business plan and provides you room for the weight loss program you’ve been talking about. Plus, the signage is great.”
Sam nods.
The tenant rep is somber. “Each day you don’t make a decision, our negotiation leveraging power slips away.”
“I know, I’ve been busy restructuring the business. Truth is, I don’t want to move if I don’t have to. Yet, I don’t want to be stuck with a lease rate I can’t pay.” Sam admits.
The rep tilts her head and thinks. “Ok, this place costs you an additional $1,000 a month or $250 a week. Does this retail location generate enough walk-in traffic to offset that difference?”
“Last week I was shocked; three people stop by and this week another two. I think it is because the vacant space is finally leasing up. Yes, it’s close.” Sam concludes.
The rep continues her train of thought, “Good to know. What is your slow month of the year?”
“July and August.” Sam says. “Why?”
“The landlord doesn’t want to budge on your lease rate. He probably wants to sell his asset and needs the higher lease rates.” She eyeballs Sam. “I have an idea, but first, I need to know if you would be ready to move to the other location if the landlord doesn’t like our proposal?”
Sam shrugs, “Well, I need to hear the idea before I can commit to that.”
On a roll, the tenant rep continues, “Will you accept the landlord’s renewal proposal if he adds in one month of free rent each year for the month of August? That will reduce your rent by $2,500.00 each year or about $200.00 a month. This allows the landlord to save face on his rental rate. ”
The corners of Sam’s mouth turn up. “Let’s give it a try. Yeah, that works for me.”
“Ok, but you have to be prepared to walk away if the landlord won’t budge.”
“I am.”
Critical Insights
The tenant rep outlines the cost of a new tenant to the retail landlord.
Do The Math
- Tenant Improvements: No Pain: $21,000 / A new tenant*:$21,000-$28,000
- Free Rent: No Pain: $15,000 / A new tenant*: $9,000-$15,000
- No Tenant (estimate): No Pain: $0 / A new tenant*: $15,000
- Commission: No Pain: $8,000 / A new tenant*: $10,000
- Quality of Tenant: No Pain: 30 years / A new tenant*: Unknown
- Total: No Pain: $44,000 / A New Tenant:* $68,000
*All new Tenant prices are estimates to show the comparison, all lease agreements are unique.
It costs the landlord about $68,000 for a new tenant and $44,000 to keep a reliable, steadfast tenant. The landlord recognizes the value of maintaining an existing tenant and accepts Sam’s counter.
Name of the Game
It took 5 months to negotiate No Pain’s renewal. But it was worth it. The landlord agreed to a new interior and one month free rent each year.
$$$ Tip: Understand the landlord’s financial point of view. It can work in your favor when presenting your counter.
Tenant Rep Victory Points
- Sam trusted his tenant rep’s out-of-the-box thinking.
- The tenant rep reminded the landlord of No Pain’s value over a new tenant.
- The landlord responded positively to renewing a model tenant.
