Over the last two years, the Triangle area commercial real estate lease space market has changed dramatically. During this period, vacancies have soared and rates have dropped. Another phenomenon, lease recasting - the renegotiation of rate and terms prior to contract expiration - has become a prevalent occurrence that can substantially reduce a tenant's overhead expense."Many businesses are struggling with the "new normal". Renegotiating their space lease is a great way to realize cost savings literally overnight," says Brian Farmer, Advisory Services President with Coldwell Banker Commercial TradeMark Properties in Raleigh.
Surprisingly, many business owners and managers aren't aware this option is available to them and when briefed on it, think it's a "too good to be true" trap. So, let's explore the basic facts of recasting commercial real estate leases.
Q) How does recasting work; what are the steps?
A) A commercial real estate advisor reviews your current lease contract for key terms, conditions and costs. They conduct a market survey for comparable lease space and compare the findings with the details of the current contract to determine if lease recasting could produce a meaningful cost savings. If so, the advisor negotiates with your landlord for better terms in exchange for a new contract with an extended timeframe.
Q) When is it appropriate to consider recasting a commercial real estate lease?
A) Tenants shouldn't initiate the process prior to the third year of a five year contract, the fourth or fifth year of a seven year contract or later than 18 to 24 months before contract expiration.
Q) Is lease recasting legal and ethical?
A) Yes. It's an accepted practice in the commercial real estate universe that more frequently occurs when a lease space market has higher than normal vacancy, which is currently the case in the Triangle area. Experienced tenants are intimately familiar with the process and deploy it at-will if the opportunity arises.
Q) What are the key considerations of recasting a lease?
A) The location and space should meet your needs for the foreseeable future. Area amenities should be sufficient for employees and clients, if applicable. Plans to close existing, or open new locations, must be considered. An experienced commercial real estate advisor will be invaluable in identifying and clarifying these and other potential considerations based on your unique circumstances.
Q) What are the major benefits realized as a result of the recasting process?
A) Real estate is one of the largest overhead expenses, so the obvious benefit is the ability to lower your lease costs immediately. Another equally important advantage is ensuring the square footage you're leasing is being utilized as efficiently as possible. You might also be able to secure favorable terms to allow future expansion at the current location, or relocation to another property owned by the same landlord.
Q) Why would landlords agree to a lease recasting; what are the advantages they realize?
A) In the Triangle market, flex-, warehouse and office space vacancies are hovering near 20%. If a landlord can secure a new lease contract prior to the expiration of the current one, the possibility of a tenant relocating is precluded, the property's cash-flow is maintained and a potential lender cash-call is avoided.
Q) Don't landlords incur costs associated with recasting that they otherwise wouldn't?
A) No. If a landlord loses a tenant, they will likely be subjected to greater costs associated with leasing the space anew.
Q) Why shouldn't a business attempt to recast their lease without the assistance of a commercial real estate advisor?
A) A seasoned advisor's insight, familiarity with the local market and negotiating skill are an advantage tenants won't have working on their own. Landlords know they have to negotiate in good faith with an advisor because the current market survey they've prepared will allow the tenant to easily begin searching for a new location. And, most landlords actually prefer working with commercial real estate professionals because they share an understanding of the business which results in the process flowing more smoothly.
Q) What else is important to know about lease recasting?
A) The recasting process requires an insightful objectivity that many business owners simply don't possess. An experienced advisor will facilitate a professional and cordial tone throughout the negotiations, a key element for achieving a satisfactory outcome. Professional advisors are involved in the process from start to finish allowing tenants to focus on their business. Should the need arise for complimentary advisory services, established firms likely can suggest several service providers for the tenant to choose from.
