Kelly Fitzgerald is frustrated—and with good reason. Her company's landlord is raising the rent on its office space by 45 percent. Fitzgerald, co-founder of Breakaway Communications, a technology public relations and communications firm in New York City, has tried counter offering, but it's a no-go.
"The current landlord won't budge," Fitzgerald says. "They don't need to, because we are literally in the most expensive submarket in the world—Manhattan, Midtown South."
Fitzgerald isn't quite sure she believes it, but she says that's what everyone in the real estate industry has told her, and her broker is having no luck finding a new place with a more reasonable monthly fee.
"The inventory of space is anemic," Fitzgerald explains. "We've expanded our search area to accommodate less ‘hot’ parts of town, but again, [there's] low inventory and what's available isn't very aesthetically acceptable. I think we're going to be stuck paying $12,000 a month when we're currently paying $9,000—and that's before electricity and real estate taxes."
Through the Roof
A dramatic upsurge in rent is a problem every business owner can potentially encounter at the end of a lease, and unfortunately, there's very little you can do if your landlord is set on raising the rent. Lloyd Parris, a Denver-based antique shop owner, found that out the hard way several weeks ago. The ABC affiliate in Denver ran a story on how Parris' landlord suddenly decided to triple his rent. Parris, who'd run his store, Packrat Antiques, for 38 years, decided it was time to close up shop.
For most business owners, however, closing your doors isn't an option. So if your landlord comes knocking for more money, here are four tactics you can try to negotiate a better deal:
1. Reason with your landlord. It's worth a try, says Iryna Carey, a partner in the real estate practice at Kurzman Eisenberg Corbin & Lever LLP, a law firm in White Plains, New York. Although landlords have no legal obligation to keep rents reasonable for the tenant, Carey says, some will be more sensible than others, and you may be able to negotiate a better rate.
"You can point out that you've been a great tenant and remind your landlord of the benefits of keeping you there," Carey explains, citing some of the downsides of finding a new tenant. For instance, before making the space available to rent, many landlords will have to "fit out the space," industry lingo for paying for upgrades and renovations to make the place desirable for a new business to rent. The landlord will also incur broker fees. And if the landlord can't find a new tenant right away, Carey says, the space might stand empty for months, effectively losing money for the landlord every month it's vacant.
In short, finding someone new is going to be a pain in the neck. Reminding your landlord of all this might strengthen your case at the bargaining table.
"Another thing you need to ask yourself is whether you're currently paying market rent," says Ron Throupe, an associate professor at the University of Denver's Daniels College of Business. "If you are, then certainly asking your landlord to explain the increase makes sense. If your landlord's catching up from below market rental rates, however, there's less chance of negotiating [a lower rate]."
Unfortunately, for most renters, current market conditions give landlords the upper hand. "The rental market is very tight right now with low vacancies even after rent increases," Throupe says. "So it very much favors the landlord."
One other thing that could be in your favor: whether your landlord is a single person or, as CPA and financial planner Jerry Love puts it, "a large publicly traded real estate management company. Then you probably don't have much expectation for a relationship. It's strictly a numbers thing when the lease comes up. Whereas if you have a person in your community who's a landlord, you might have a better chance."
Love, who started his own business, Jerry Love CPA LLC, three years ago in Abilene, Texas, is in year three of a five-year lease. He feels pretty secure that his landlord, who lives in Austin, won't double or triple his rent when the lease is up.
2. Make it clear you're prepared to leave. It may not be easy for a landlord to find a new tenant, but it sure isn't a picnic for the tenant to find new workspace, especially if it's a retail business that depends on a steady stream of customers who know exactly where to find them. Your landlord knows that, and they may be playing a game of chicken with you, assuming that you'll never actually leave.
"The best way to combat a landlord raising your rent is to get out there and start finding other options," says Star Hughes, director of Hughes Marino Inc., a San Diego-based commercial real estate firm that solely represents tenants. "It's our job to find several great alternative office spaces for clients even if they would most like to renew their current lease—this creates leverage with the existing landlord.
"The best negotiation strategy is being willing and able to walk away," Hughes adds. "Most of the time, when a landlord realizes that a tenant has one foot out the door, they'll do everything in their power to keep them."
In which case, this is a game of chicken, but you've won.
3. Negotiate an extension. OK, so your landlord won't budge and your rent is going to climb to heights you can't reach. Your only recourse is to move. At this point, Carey suggests asking for an extension of three to six months at your current rent. That could buy you the time you need to find a new place so you aren't in too much of a rush. Unless a replacement tenant has already been lined up, this should help your landlord as well.
4. Try to prevent this from ever happening again. If you're forced to leave your current location, the last thing you want to do is repeat past mistakes. So before you locate and move into a new space, put some protections in place to help you in the future.
"The best preventive measure to maintain stable rent is to sign a long-term lease," Hughes says. "A landlord can't decide two years into a five-year lease to double your rent, as both parties are locked into that contract." If you're confident this new location will fit your business and your goals for it for some time, talk to the landlord about increasing the length of the lease to seven years or more. The longer your lease, the more stable your rent.
Of course, no matter the length of your lease, it will eventually end, so try to get a broker or your attorney to add a clause to the contract that guarantees your rates won't climb dramatically. "It's important to have detailed renewal language written into the lease," Hughes says. For instance, she explains, you and your landlord might agree that after the lease ends, they can only increase the rent by a certain percentage or that the new rent will be equivalent to the current fair market rent for similar buildings.
No matter what stipulations your contract contains, the end goal should be the same: to create a landlord-tenant relationship that is beneficial to both. By agreeing on reasonable rate increases, the landlord keeps a good tenant and avoids all the costs associated with finding a new one. And as the business owner, you know you've done everything possible to keep your overhead manageable. Renting this way may allow you to buy some peace of mind.
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