Tenant: Financial Services Company
Location: Minneapolis / St. Paul, Minnesota
Space Type: Class B Suburban Office Space
Tenant History
The tenant occupied space in a Class B building in a suburban office market in the Twin Cities. The building was a very good fit for their business and they didn’t want to relocate. The tenant negotiated their own lease renewal in 2013 – which was a gross lease, plus had a 2011 base year on expenses. In addition to agreeing to an above-market Year One rental rate in 2013, the tenant also agreed to $0.50 per square foot annual increases – also above market. The tenant also did not change or delete the base year expense clause, which resulted in $2.00 per square foot of additional charges annually above what they thought they had negotiated in the gross lease.
ITRA Global Engaged for Advisory Services
ITRA Global l Minneapolis-St. Paul was retained in 2018 for lease advisory services and quickly realized that the tenant was paying far more than the market rate, and why. We requested a proposal from the current landlord for a new 5 year lease with many changes proposed in the lease structure. We also showed the client other buildings in the market, but the preference was to extend the existing lease with improved terms.
Negotiations
The landlord was aware that the tenant was paying above market rent, so negotiations to reduce the tenant’s rental rate by 27% were very smooth. The new lease structure was changed to a net lease, so the additional base year expenses were no longer applicable. In addition to the changes noted above, we were also able to negotiate a tenant improvement allowance and a termination option. Our client was very pleased with these favorable results.
Lessons Learned
Tenants often end up paying way too much when they negotiate lease renewals themselves - without having input and representation from an experienced real estate advisor. Despite a very sluggish economy in 2013 and being located in a submarket that was well over 15% vacant, the tenant signed a lease renewal that was significantly higher than market. Why did they sign a bad deal? They believed their landlord had offered them a fair deal - as they had been a long term tenant in the building. However, landlords are for-profit businesses and lease renewal terms offered to existing tenants are typically not fair and not at market rates. In many cases, landlords see existing tenants as “captive markets”, and as such, charge above-market rates on lease renewals when they are not represented by a lease advisor.
Article submitted by Wayne Teig / ITRA Global Minneapolis-St. Paul, Minnesota USA
