Do you wait for National commer. tenant to contact you about utilizing their option?

[Tania Leung]

For National Commercial Tenants, do you wait till they contact you at their required 6mos notice date or do you as a landlord, contact them to ask them what they plan to do 7-8months out from lease ends?

[James Storey]

Quote from @Tania Leung:

For National Commercial Tenants, do you wait till they contact you at their required 6mos notice date or do you as a landlord, contact them to ask them what they plan to do 7-8months out from lease ends?

 I always ask within 6 months before the renewal notice. That way it gives me ample time to figure out what I need to do with the property. Most National Tenant have am overall corporate understanding of how they are going to move their real estate portfolio for the given year so you should know what they plan to do prior to the deadline in most cases.

James Storey, CCIM

[Cody J Leivas]

Depends on your strategy. It should spell it out in the lease and typically the tenant is the one that needs to provide notice to exercise a renewal option. 

If you would like them to renew or extend, you'll want to be proactive. 

If you believe that the space would be easy to fill at a higher rent then you should wait to see if they reach out. If they pass the 6 month notice date, you will have more leverage and have the ability to begin marketing the space. 

[Tania Leung]

Thank you @James Storey and @Cody J Leivas.  It is my first national commercial tenant and according to their lease, they have to give notice 180 days prior to lease end to exercise their option.  It is approx 10 months out before lease ends, When is the best time to approach them without sounding too aggressive?  I would like to be proactive, but not desperate.  Thanks in advanced

[Cody J Leivas]

I would say 1-2 months before the 180 day notice would be standard. 

In the lease, does the rent continue at a specified rate or is it fair market value?

If its fair market value, I would begin gathering comps before you have a discussion on renewing the tenant. 

@Tania Leung

[John McKee]

You can contact them anytime you want.  If they drag their heals past the deadline, then you need to start advertising the property.

[Tania Leung]

@Cody J Leivas and @John McKee Thank you

[Matthew Drouin]

@Tania Leung I think you got some great advice here!

If you are nervous about it. Contact them early to see what the plans are and if you should start hedging for scenarios under the possibility of them not staying.

If you are super nervous, one thing I’ve done is negotiate concessions to them renewing early. Maybe drop the rent for the first renewal year or throw in some tenant improvement allowance.

[Tania Leung]

Thanks @Matthew Drouin

[Matt Moreland]

@Tania Leung, every Cody has said above is exactly right. If you want to renew with them, reach out 1-2 months before their renewal window approaches in case they have forgotten (you might be surprised how often this can happen in large national firms with so many small moving parts) so that they have ample time to discuss and get back to you. This also leads to having more time for y'all to negotiate as well if they have more/new asks for you as the landlord/landlord rep.

If you do not wish for them to renew, I would not reach out early to see if they're renewing. Depending on what the lease says, they may have a specified number of options to renew at fixed rate increases over X number of years (for example, they have 3 options to renew with each renewal consisting of 5 years with a set annual gross rent increase of 3.5% or something along those lines). Working with some Fed tenants, they had been in my landlord client's space for decades when I came on as the leasing agent. They were 3 years out from terming on their lease when they reached out to me requesting they go ahead and sign a renewal for another 5-year term when this lease ended, with 10 consecutive options for 5 years each after that (essentially locking down the space for 50 years if they chose to do so). Most tenants are not this proactive, but if you can get big tenants like that secured with strong terms and agreeable escalations corresponding to each option/renewal, they can be some of your most stable tenants.

In other cases, there may be no outlined/detailed renewal options stated in the lease, and in that case it is possible in certain circumstances to notify them at the appropriate time that the landlord does not seek a renewal and will be listing the property for lease at market rate if the lease contract states that is within the landlord's agreed upon rights. Again, this is never the ideal scenario and is not the route that you want to go down if possible, but it does happen. 

Best of luck, Tania, and I hope you are able to secure your national commercial tenant for years to come!

All the best,
Matt

[Courtney Nguyen]

@Matt Moreland What are some of the most common concessions you see landlords give tenant to get them renew the lease?  One time I heard this prospective tenant said at his other location his landlord gave him 1 month free per each year in his renewal period.  Sounds too much to me so not sure if it's true.

[John McKee]

I gave a tenant new flooring because they always complained about the flooring in order to secure a renewal of a lease.  Another tenant I gave fixed rent for 5 years as opposed to rental increases.  I gave one tenant free rent during the pandemic for 3 months if they renewed their 5 year option earlier even though they still had 9 months left. 

[Courtney Nguyen]

@John McKee thanks for the info.

[Joel Owens]

You can always ask anytime you want to the leasing administrator. You do not have to wait as landlord. The TENANT can however decide to engage in negotiations early OR say they want to WAIT until the time they are obligated in the lease to say if they are renewing or vacating the space.

6 months is minimum notice for options. I would rather see 9 to 12 months to be given more notice to start working on other tenants for the space. There are typical signs before that if you have sales numbers to see how tenant is doing and if they re-imaged their store recently. Those tend to point to staying unless the site is a C site and they had no other options when they moved in that market or the rent is abnormally high. Those would tend to cause them to move. 

[Matt Moreland]

Quote from @Courtney Nguyen:

@Matt Moreland What are some of the most common concessions you see landlords give tenant to get them renew the lease?  One time I heard this prospective tenant said at his other location his landlord gave him 1 month free per each year in his renewal period.  Sounds too much to me so not sure if it's true.

 1 month free per each year seems excessive in my experience, that's more than an 8% annual discount in rent which knocks out any annual increases accounting for property tax, insurance, and inflation increases IMHO.

Typically most concessions are seen upon signing of the initial lease, with any further concessions in renewals being negotiated or brought up well before time to re-sign. At initial signing, you will often see a Tenant Improvement (TI) allowance to aid them in getting setup and operational. Some others: delayed payment of first month's/last month's rent, payment plan for deposit so they can spend more $ standing up the location and getting it to a point its generating revenue, etc. 

For renewals, the "concessions" usually tend to be small requests made by the tenants that aren't necessary but would indeed help them be more comfortable in the space. I've had requests for tinted/reflective window film to help keep it cooler inside a location with big windows (this can be a win-win actually, since it cuts down on HVAC usage and can extend useful life and the amount of time shoppers want to spend in the store). Requests for more/different lighting, new flooring/professional carpet cleaning in stores with high-traffic carpeting, things like that. I've never had anyone come back and request upon renewal to get reduced rent, recurring discounts, or a brand new TI budget. However, I could see a longterm tenant (2+ renewals) requesting some assistance with TI if they have been in the space long enough that it has become dated and needs to be completely updated.

Hope this helps and answers your question, Courtney! Feel free to reach out if you have any more questions! Always happy to talk real estate.

[Courtney Nguyen]

@Matt Moreland it does help.  Thanks a lot Matt!

[Courtney Nguyen]

@Matt Moreland it does help.  Thanks a lot Matt!  If we have vacancy again I will be reaching out to you :)