During the financial turmoil of the last 18 to 24 months, nearly all office tenants would acknowledge that they’ve been negatively affected financially one way or another. In fact, tenants seeking reductions in monthly rental obligations have deluged many landlords and asset managers.
Virtually every business has been under pressure to reduce its operating expenses, so why should office tenants be any different? Rent is typically the second highest expense (after salaries and compensation) for any business.
So…what can you, as an office tenant, do in the face of the “Great Recession”?
Several things can and should be done as a response to today’s economic climate, but how that process is conducted can be critically important to your success. Landlords operate businesses just like you do, and are very understanding and keenly aware of how the fortunes and profitability of any business can shift dramatically and on a dime. Here are some things to keep in mind before you choose to go down that path:
- LANDLORDS DO HAVE A HEART. Most will agree to meet with you, most will listen very carefully to your requests, and most will try to do whatever they can to work with you. Don’t be shy about calling your landlord to meet and discuss how your fortunes have changed and what he can do to help.
- CALL YOUR BROKER TO DISCUSS A STRATEGY. If you retained a broker to negotiate your lease, get their money’s worth and call them to discuss the situation. The more experienced your broker is, the more helpful they can be. Keep in mind, however, that most brokers will graciously do their best to argue your position, but will, privately, be very tentative about doing so. In general, it was the landlord who paid their compensation previously and is the same landlord that will pay them commissions in the future. The last thing any broker wants to do is to let that check-writing system know that you’re not able to honor the obligation you had agreed to months or years earlier.
- BE PREPARED TO SUBSTANTIATE YOUR CLAIMS. While most landlords will be more than willing to consider your request for a reduction in rent, virtually every one of them will request copies of your financials to substantiate those claims. Have them ready for review and provide them only to the owner’s representatives, who will professionally and sincerely honor your request for confidentiality.
- CONSIDER THE OBVIOUS. Many tenants start the process of lowering their rental expenses by reconfiguring their offices to allow for subleasing. Depending on the circumstances, you may want to notify your landlord in writing that you are requesting that he immediately begins to market part of your space on a direct basis to mitigate any damages that may be incurred.
- BE CREATIVE. Believe it or not, most tenants have a notion that landlords can simply mark down the price and unilaterally lower the rent without any additional compensation. Will. Not. Happen. Simplistically, they will want something in return, whether it’s an extension of the lease term (“blend and extend”) or rearranging the rental structure so the money is paid at a later date, but at a higher cost per foot than originally agreed to. Keep an open mind and be willing to consider any suggestion that comes up.
- BE FORTHRIGHT. As shocking as it may seem, many tenants are not truthful with their landlord, and may, in fact, be using the Great Recession as justification for reducing their rent. “Everybody else is doing it, so why shouldn’t I?” Very often, landlords will see right through that, which only causes your credibility to suffer…never a preferred outcome.
- BE REALISTIC. There are only so many ways to re-structure a lease, and like any other negotiation, the party on the other side of the table will be asking “What’s in it for me?” Their willingness to agree to a reduction will almost always involve some concession on your part.
- BE COMMUNICATIVE. When a broker told me months ago that he knew of a business that was about to move out of its building in the middle of the night, I told him to advise the tenant against it. Landlords can’t stop you from moving, but that type of decision will more often than not cause hard feelings, which may also strengthen their resolve to pursue you legally, something no one wants.
If the end is at hand, just call the landlord, request a meeting, and explain why you will have to end your occupancy in the building. Then, do yourself a huge favor by asking what would be the easiest and best way to get that done. Don’t be surprised if you get far more in return from that hardhearted landlord than you may ever have thought possible, including but not limited to a decision to not try and chase you in court.
Bradford Perry, principal of PerryCRE, is a commercial real estate broker, an attorney, and former property manager of two high-rise office buildings with 18 years of experience in commercial real estate. He can be reached at email@example.com.