I recently received a call from an accountant who sounded concerned. "I think my client is about to make a big mistake with his commercial lease renewal," he said. "I'm glad you called," I replied. "But what makes you say that?" He explained, "The landlord told my client that if he didn’t involve his real estate broker in the renewal he could give him a better deal. I just don't trust this landlord. It feels like he is saying that because he knows he’ll get better terms on the lease renewal than if a broker was involved. What do you think?"

I told him this: Savvy landlords often try to weaken a tenant's position during lease renewal negotiations by undermining their first line of defense—the right to have a specialized tenant representative negotiate on their behalf. In a strategic move, the landlord may offer undefined incentives like “I’ll give you a better deal,” but those often come with hidden costs. Unsuspecting tenants will be tempted to move forward without a tenant representative before fully considering the pros and cons of having representation.

Pros and Cons of Accepting the Landlord's Offer

Pros:

1. Potential Financial Benefit: The tenant thinks they will receive better lease terms without a tenant representative involved. Unfortunately, the tenant doesn’t know the market conditions and has no way of knowing if they are getting a better deal or not. If the landlord offers a few months of free rent it might sound like a pretty good deal to the tenant, but it might be a lot less than what is available in the market. 
2. Simplified Process: By negotiating directly with the landlord, the tenant might experience a faster and seemingly more straightforward negotiation process without the intermediary of a tenant representative.
3. No Brokerage Fee: The landlord will reinforce that the tenant is getting a better lease because there won’t be a brokerage fee paid to the tenant representative. The tenant doesn’t know that a brokerage fee is typically the least expensive item that a landlord pays on a lease renewal, compared to the costs of tenant improvements, free rent, or other lease concessions the tenant receives. 

Cons:

1. Loss of Professional Representation: The most significant drawback is the loss of specialized representation. A tenant representative understands market conditions, lease terms, and negotiation tactics that the tenant may not. Without this expertise, the tenant is overmatched when playing against an experienced landlord who negotiates leases every day.
2. Potential for Unfavorable Terms: Without a tenant representative advocating on their behalf, the tenant may unknowingly agree to terms that are more favorable to the landlord. This could include higher rent, less favorable renewal options, or clauses that could be detrimental in the long term.
3. Short-Term Gain, Long-Term Loss: While some upfront savings like a little free rent might seem attractive, the tenant could end up paying more over time due to a higher rental rate or higher annual rate increases, or both. In the end, the initial financial benefit probably won’t outweigh the long-term costs.
4. Reduced Leverage: A tenant representative's involvement can provide leverage in negotiations, as they can bring multiple market opportunities to the table. Without this leverage, the tenant will have less negotiating power.

While the offer from the landlord might appear attractive, tenants should carefully weigh the seemingly immediate financial benefit against the potential risks of entering lease negotiations without professional representation. It's often wise to consult with a qualified tenant representative to fully understand the implications before making a decision.

Find one of our commercial real estate experts near you here. All ITRA Global members exclusively represent tenants and provide principal-level expertise based on transparency, integrity, and trust. With members worldwide, ITRA Global is uniquely positioned to meet all your real estate advisory needs.

Our Difference is Your Advantage

Article submitted by Buddy Francese, CCIM / ITRA Global Austin, Texas USA