How Advanced Should You Approve A Lease Renewal?

Many commercial real estate brokers believe that it is never too late to begin negotiating a lease extension. They will be less likely to have to compete against other firms for the tenant's business if they start negotiating early. There is no such thing as "too soon."

Although an early renewal of a lease can often result in a win-win situation for both the landlord and tenant, tenants need to ask the following question before they commit to such a transaction: "Is this renewal deal compelling enough for me to forgo market competition and have additional time to evaluate the future?"

When To Accelerate

The size of the lease requirement determines how often parties start to discuss a lease renewal. It may be appropriate to speed up the process if the landlord or tenant has urgent business needs. This could include, for example, if the landlord needs more space or to address a cash flow problem or needs additional investment dollars. Suppose the landlord is trying to manage its immediate exposure due to lease rollover or preparing its asset for sale, refinancing, or sale.

We will refer to an "early renewal" as any renewal before other landlords are willing to offer the tenancy. It is also assumed that the primary goal of an early renewal by a tenant is to save money on leases.

Unfortunately, the rent premiums at the end of the term and concessions for tenants below-market prices often outweigh the savings from early renewals. Why? The landlord often wins these types of negotiations.

Tenants are denied the opportunity to shop with other landlords for the best pricing. The landlord does not have to worry about losing the tenant if the tenant's lease expiration date falls too far in the future. When they aren't competing with anyone, landlords don't often offer their best deal.

Renewal Discussions

The landlord who is currently managing the tenant's renewal negotiations will not hesitate to make aggressive offers if it defers them until they are offered aggressively by other landlords. Tenant also has a benchmark against which it can evaluate the other landlord's proposals for renewal. Tenants should not accept these deals unless there is a compelling reason for them to renew their lease early. This can only be done by creating comparative financial models that allow for reasonable market assessments and how the lease will likely perform when it is due.

One problem with early renewals, is that they take tenants away from the time. Tenants should project their staffing requirements into the future, as lease terms can often be five years or longer. Tenants who can delay their space decision for longer periods of time will have more information about their business and economy, which will allow them to plan for future requirements. Tenants considering early renewal should consider whether they are saving money in the long-term by doing it now and whether the savings outweigh the risks of making an unreliable decision.

There are many reasons why tenants may wish to renew their lease early. However, if they want to reduce total occupancy costs, they should discuss the proposal with their advisor. They can model future market scenarios and compare it to the proposed lease. Tenants must also decide if the benefits from a new, accelerated deal outweigh the chance to evaluate their business prospects for the remainder of the lease term.