Strategies to avoid massive rent increases from a landlord

I hosted a webinar yesterday, our team’s first.

I’ve watched others, just not from commercial real estate practitioners. They often employ these sessions as a way to add value, stay top of mind with clients, and generate new business. I was excited to try my hand.

We were thrilled with the outcome as our room was crowded with a combination of prospects, strategic partners and clients. All who attended found pearls.

So what was discussed? Ways to renew a lease on YOUR terms. A synopsis follows.

The genesis of the Zoom centered around landlords sending notices of whopping rent increases. We believed a counterbalance of sorts was necessary.

Why such BIG increases? Pandemic-fueled demand coupled with skimpy supply – little to no new construction in certain size ranges – has caused a classic imbalance that resulted in price increases.

Know your owner: Owner investors fall into distinct categories: institutional, private national, private regional and private local.

An institutional landlord such as ProLogis or Rexford will view rents differently than a neighbor who might own one or two industrial buildings.

How you may ask? A building’s worth is capitalized rent. Therefore, to an institutional owner, the coupon rate is paramount. Many times concessions will be given to keep the rate intact. Generally, a private owner will be more interested in cash flow and potentially will discount rent to avoid a costly vacancy.

Your value as a tenant: The most a landlord can achieve is the market rent, which is a look back and a look forward at the transactions that have occurred and the new availabilities.

Let’s say that amount is $20,000 per month. With 4% annual increases built in – the maximum a landlord will get over a five-year term is $1,323,878.

But what will the landlord expend to achieve the market rent? Most likely, downtime while the building is shopped, abated rent once a new occupant is located, refurbishing the space, potential tenant improvements and brokerage fees. All of these must be subtracted from the total expected. Known as an effective rate, it’s seldom equal to the coupon rent. In down markets, an owner will spend 20%-25% of the future take originating a new lease.

Extensions rights: You may have pre-negotiated your right to stay. Take a look at these clauses: options to renew, terminate, expand and rights of first refusal or first offer. Just remember, time is of the essence. You must adhere to the periods specified.

Timing: In today’s robust market and scant availability, you may be able to relocate, sublease your remaining term and make money. In some cases, the property owner will want a taste, however.

Cost to relocate: The Yang to the Yin of the cost to replace a tenant is the dollars required to move. If you have large machinery, a special purpose use, ISO certifications or a spray booth, you’ll be shocked at how expensive it is to change quarters. Know these costs. Your landlord will use them as leverage.

Next steps:

—Find your lease.

—Know the key dates and terms.

—Create a system for assessing market trends.

—Schedule an annual virtual or in-person meeting with the landlord.

—Don’t forget: You have the right to representation. Your owner certainly will have someone.

Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at abuchanan@lee-associates.com or 714.564.7104.