Lease Renegotiations: Striking a Balance to Win

Lease renegotiations, restructures, recasts, blend and extends…these and others are the terms in use today by brokers, tenants, and landlords for what amounts to the same type of transaction….changing the terms of existing leases.  Today, with the market for new real estate transactions being quiet, most active commercial brokers are pitching lease renegotiations.  And, for good reason.

Market conditions aren’t the only justifications for renegotiating leases.  Opportunities exist that often have little to do with market conditions for both tenants and landlords to improve their respective positions .  As a result, tenants have secured millions of dollars, reduced risk, and created other value by renegotiating leases.  Interestingly, when tenants renegotiate their leases, the corresponding result is that those transactions directly or indirectly create equal or greater value for their landlords, too.  That’s actually how lease renegotiations really work…in order to be successful, a lease renegotiation must benefit both sides!

I recently watched a video of a commercial real estate broker who said tenants that seek to renegotiate their leases are dishonest, because they’re not keeping their word and are looking to break their leases.  This guy couldn’t be further from reality!  Did he really think that a landlord and its lender would renegotiate a lease just because a tenant demanded it?  Did he believe that landlord and lender would do so on terms that would offer no advantage to them but, only benefit the tenant?  Did he think that a tenant could actually force a landlord to renegotiate?  It doesn’t work that way.  No lease can be renegotiated unless both landlord and tenant realize enhanced value.  What’s more, no landlord worth his or her salt would agree to renegotiate a lease unless doing so would create sufficient benefit for himself / herself, too!

The opportunities in lease renegotiations are many.  So are the risks!  The true impact of both opportunity and risk, and other factors, must be fully considered in order to assess the possible mutual benefit of a renegotiated lease, with the operative term being “mutual”.  In the horrible economic crisis in which we currently find ourselves, the name of the game for tenants, landlords, lenders, individual consumers, or commercial brokers, is “sustainability”.  Done right, lease renegotiations can provide commercial tenants with the ability to uncover dollars hidden in their lease obligations thereby, reducing their occupancy costs as a means of achieving sustainability.  Tenants also benefit by mitigating risk and securing additional flexibility. 

For landlords, lease renegotiations can support their own sustainability objectives.  Such transactions can ensure the long term financial viability of commercial properties and minimize landlord and lender risk that would otherwise be associated with increased vacancy from pending lease expirations.  Lease renegotiations pose special challenges for landlords, such as the immediate and unplanned reductions in rental cash flow;  the need to fund, what could easily be, significant capital for allowances, improvements, commissions, and more.  Equally important is the fear on the part of landlords that after renegotiating a lease and accepting less now in exchange for more later, a tenant could default anyway, leaving the landlord worse off than if it had not renegotiated the lease! 

The key to a successful lease renegotiation, like any well-built business transaction, is the ability to strike a balance, and ensure that neither tenant nor landlord goes to the poor house as a result of a lopsided negotiation.  The term “Win! Win!” for both sides is the primary focus of a successful lease renegotiation.  An awful lot of these transactions are taking place as you read this.

Send me your stories about successful lease renegotiations or those that went bad.  If they’re good, I’ll publish them here.  No commercials, please.