contact
 
 
     

How to Re-negotiate Your Lease

How to Renegotiate Your Lease

Christopher Steiner, 02.02.09

You have more bargaining power than you think.

Variable costs like payroll, office supplies and advertising usually draw first blood in a recession. But some ostensibly fixed burdens are ripe for whittling, too, if you know how to negotiate. A big one: leased real estate.

In this market, even agreements inked for the next five or 10 years are open for negotiation. Indeed, landlords have all but come to expect the conversation.

"With the kinds of hits that most businesses have taken in sales, they can't afford to pay out at the occupancy rates they have been," says Ivan Friedman, chief executive of RCS Real Estate Advisors in Manhattan.

In Pictures: Timely Tips For Recession-Racked Entrepreneurs

In Pictures: 14 Creative Cost-Cutting Tactics

In Pictures: Seven Slimy Landlord Schemes

In Pictures: What To Do When Your Landlord Goes Bust

What kind of deal can you cut? That depends on a few things--your landlord's overall occupancy rate and your flexibility with moving are two big ones--but basically it comes down to how bad things really are. Matthew Bordwin, managing director of the Real Estate Services Team at KPMG Corporate Finance, says that lease reductions can be anywhere from 5% to 50%, and breaks of 30% are not uncommon.

"What it comes down to for the landlord is this: Would they rather take a 30% reduction in rent or simply take zero?" he says. "They usually opt for the 30% break."

Consider a high-end clothing boutique, with 15% operating margins (profit before interest and taxes). Say rent typically eats 12% of sales (or $1 for every $8 of sales). With retail sales off in the neighborhood of 40% in the last year, that rent-to-sales ratio looks more like 20%, slicing already slender margins by more than half. Either find a way to cut costs, or go out of business.

You may have to whip out your books to plead your case, advises Bordwin. "Landlords know that they probably need to consent to some form of a rent reduction if they want to keep tenants in this environment," he says. "There aren't many idle threats being made today. So many businesses find themselves in trouble."

Another negotiating lever: "Tenants can walk down the street and throw a dart and find empty space elsewhere," says Bordwin. "And it's likely that the other landlord will find a way to get them in."

Due diligence helps, too, so know the market. A landlord with a glut of empty space likely will be more willing to cut a generous deal. "The landlord with a Circuit City and a Linens 'n Things can't afford another tenant leaving," says Bordwin. "He's already behind the eight ball."

Even relatively healthy renters can press their landlords for breaks. In this economy, stability is a coveted asset. "The stronger tenants, historically, have not gotten rent reductions when they've asked," says Bordwin. "But now, [even they] are having an easier time getting their rents lowered by simply asking. Nobody wants to lose a paying renter right now because it could take months or years to refill that space."

A good strategy for healthy businesses looking for rent reductions is to pursue a lease extension, says RCA's Friedman. Landlords are apt to surrender a 20% decrease in rent for a commitment of two to five years. Tenants should ask for that decrease to begin immediately, says Friedman.

"If you have a lease that's expiring in, say, six months, that's as good as a bankruptcy these days," says Friedman. "You can then say, 'Look, if we don't get a substantial decrease, we're leaving.' "

Bottom line: In this economy, treat no cost as fixed. Says Friedman: "Occupancy costs have become a controllable expense."

Novel Approach to Health Plans Gains Traction
Microsoft Study: Small Businesses Using Technology to Cut Costs
Government Contracting How To's
500+ Tools for Small Business
Grow Your Business by Growing Your Credibility as an Expert
IRS May Give Some a Break
Writing a Business Plan
The Elements of a Business Plan
Turning Around a Struggling Business
How to Raise Cash for Your Business Now
The Most Profitable Home-based Businesses
Is it True That Tax Dollars are Saved by Forming an LLC
Teen Entrepreneurs Provide Information All Entrepreneurs Can Use
100 Attributes of Entrepreneurs
Managing Customer Relationships
Personal Characteristics of Entrepreneurs
Franchises Growing Despite Economy and Credit Crunch
How to Avoid Franchise Pitfalls
How to Select a Franchise
How to Succeed as a Franchisee
Why Franchisees Fail
Google, SBA Launch "Tools for Online Success" Partnership to Assist Small Businesses
President Signs Extension for SBA-backed Small Business Loan Program
New Online Course Helps Women Entrepreneurs Access Government Contracts
SBA Offers Online Course on Winning Government Contracts
SBA Affirms Commitment to Meet, Exceed Small Business Contracting Goals
SBA Names Regional Chiefs for Four Regions
SBA Announces Changes to SBIC Program
SBA Launches Refinancing Program for Fixed Asset Loans
SBA Introduces No-Interest Loan Program for Struggling Small Businesses
SBA Sets Alternate Small Business Size Definition for Guaranteed Loans
Ana Recio Harvey Named Head of SBA's Women's Business Unit
Senate Confirms Karen Mills as Head of the SBA
SBA Launches Online Community for Small Business
The Small Business State of Your State
States Develop Their Own Stimulus Plans to Aid Small Business
Small Business Critical of Stimulus
Surviving an Economic Downturn
 
 
Join Our Mailing List
Email:
How to Re-negotiate Your Lease - Strategic Growth Concepts - Business Information Articles - safe_subscribe_logo
For Email Marketing you can trust