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As seen in
October 25, 2000
Tenants looking for space don't have
to be limited
by TIM KUCHA,
DIRECTOR, PLYMOUTH PARTNERS, LTD.
 Just
because today’s real estate market is tight and landlords
have the upper hand, doesn’t mean tenants cannot find space
that suits their needs and negotiate the best lease possible.
With high rents, minimal
work allowances, and fewer spaces to choose from, tenants must
think more creatively and strategically to gain leverage at
the negotiating table.
Tenants planning to
move or negotiate a new lease for their existing space must
now pay close attention to their real estate needs, allowing
extra time prior to lease expiration. The additional time will
give them a chance to explore numerous options in order to find
the right solution. It is a tenant representative’s responsibility
to objectively expose all of the available options in order
for the tenant to make sound business decisions that will eventually
lead to significant cost savings.
One such option is for
companies to seek alternative locations. Companies trying to
escape Midtown rents are considering the Downtown sub-market
or the West Side of Manhattan. The boundaries of Manhattan are
expanding, as the once called fringe areas are becoming popular
as more and more manufacturing buildings are being upgraded
and converted into office buildings. These buildings that were
once considered unacceptable from an image and a location standpoint
have suddenly become very popular, as most of them are close
to full occupancy with office tenants.
For tenants who cannot be flexible pursuing alternative locations
outside prime districts due to the nature of their business,
one strategy is to research space before it becomes available
on the market. By using the resources of a tenant representation
firm with strong real estate industry relationships, a tenant
can better uncover similar size companies that are planning
to move out of their space early. In this case, the tenant in
search of space can pick up the remaining lease term or structure
a deal directly with the landlord.
An especially credit-worthy company in the market for a large
block of space can discuss with landlords the possibility of
relocating existing tenants within a landlord’s portfolio
in order to create suitable space. This is becoming a popular
tactic as few large blocks of space exist.
Tenants are challenged with another obstacle - the ever-shrinking
work allowances the landlords traditionally have contributed
for improving the premises. But instead of tenants now having
to go out-of-pocket for space improvements, they should be counseled
about seeking various financing options for lease held improvements.
The options allow for payments to be made evenly throughout
the term of the lease. This will make it more attractive for
a tenant to move into a space.
For some tenants, the best move is the one not made to a new
location. The tenant however must be able to look into the future
and determine if their existing space is suitable to their needs
in the years to come. If it is, the strategy is to restructure
the current lease by negotiating an extension.
The advantage of negotiating an extension long before the lease
expires is that the tenant is in the position to negotiate a
favorable rent since the landlord does not have to incur expenses
usually associated with attracting a new tenant. In addition,
the tenant can avoid any disruption of business that would occur
during a move as well as moving costs. Another benefit of renegotiating
the lease well before it expires is that the tenant does not
have to look over their shoulder with fear that another tenant
in the building might expand into their space.
Today’s tight market allows landlords to limit or even
eliminate concessions, such as free rent and landlord contribution
allowances. It is not uncommon for a tenant to move into the
new premises in the current "as is" condition. When
this occurs, the tenant representative can make a case to the
landlord for improving the terms of a lease by negotiating the
often overlooked and under appreciated details of base building
infrastructure and technical items that can add up to significant
dollars to the tenant.
Improving these terms of the lease is sometimes a far greater
value than the value of the concession.
Typically, improving base building lease terms includes HVAC
performance specifications, overtime HVAC, electrical capacity,
fiber connectivity, floor loading, life safety and code compliance,
and the general condition of space when it is delivered to the
tenant.
Landlords in New York are the most willing to consider negotiating
base building infrastructure and technical items because it
is a way to negotiate without conceding business terms that
can more negatively impact their asset valuation models. Free
rent and tenant improvements typically result in lower valuations
compared to agreeing to base building lease improvements, which
the landlord can depreciate over the long term and are also
more permanent improvements to the building.
Finally, it should be emphasized that making a move in today’s
tight real estate climate, whether it’s large or small,
will require savvy strategic planning and innovative solutions.
A tenant representation firm has the special expertise to help
tenants adapt to this market so that their options are not limited
- adding a great deal of value at the negotiating table.
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