The #1 Renewal Negotiation Mistake Made by Tenants

I never cease to be amazed to see otherwise astute business people who are confident that they can outwit a professional landlord. 

I once read that it is estimated that John McEnroe has hit a tennis ball over the net more than 13 million times.  I don't care how much you practice or warm up, he is likely going to make you look foolish on the court if you were to play him.  Landlords who negotiate hundreds or even thousands of leases each year often do the same thing with tenants that only negotiate a lease once every three or five years.

And what is the biggest "gotcha" that they usually stick it to the tenant on at renewal time?

For full service office leases and gross industrial leases, it is without question the Base Year.  What about the Base Year?  Nothing.  That is, the landlord will never even mention it. 

You want a renewal rate?  The landlord offers $20/SQFT (or whatever) and all other terms to remain the same.  Suppose that $20 seems to be about the going rate.  Not too bad, you might think.

For now, forget about the fact that a new tenant walking in off the street would probably get a lower rate, some free rent, various improvements, and that the landlord is avoiding months of vacancy by getting a renewal.  The one other concession that the new tenant is getting is a current base year for expenses, perhaps even NEXT YEAR as a base year.  You see, virtually ALL leases (in the U.S. in an investment grade property) have some provision for a pass through of expenses over a base, known formally as a Base Year.

Meanwhile, your Base Year is 2002 or whenever you signed the original lease.  And almost certainly, expenses are higher now than they were when you signed that lease.  You are getting charged pass through expenses.  If "all other terms are to remain the same", it means just that, and you'll continue to get charged those pass through expenses ON TOP of your $20/SQFT rate.  So effectively, you are paying more than $20/SQFT.  This scenario happens every day.

If your company leases space, do this exercise:  Take the SQFT that you lease and multiply it times the rental rate that you'll probably pay next time you sign a lease.  Now multiply that by the likely number of years of that lease.  Whatever the amount is, now ask yourself this question:  If your firm was involved in a lawsuit of that size, would you go to court without an attorney?  So why then, does anyone enter into a lease of that size without professional real estate representation? 

While the Unmentioned Base Year is the most common single item that unrepresented tenants neglect to properly negotiate in a lease, you could arguably say that the real #1 mistake is in not hiring a professional real estate advisor to help them think through the 30 or 40 pages of business terms that make up a typical commercial lease.

Because when it comes to taking a beating on lease issues, Less is More.