"All tenants that face lease
expirations are going out
to shop the market...It has
not been a fun time to be a
landlord."
A law firm client of mine was leasing approximately 25,000
SF of space in two non-contiguous units in the same building, and
had about 4 years left on its latest lease executed in 2004. They had
already expanded twice since moving into the building as a 14,000
SF tenant in 2001. Their typical buildout always had upgrades,
including millwork and glass, for which the tenant typically paid
about $15.00 PSF in cash for above the landlord’s building standard construction.
There was a 12,000 SF space on the same floor that was soon
to become vacant. My client needed about 6,000 SF of expansion,
but that unit was not divisible. After much back and forth, the
landlord suggested that we turn back our existing 6,000 SF non-contiguous unit, and he would build out the entire 12,000 SF unit
for us, for a net expansion of 6,000 SF.
My negotiating strategy was to “fictitiously divide” that new
unit into two halves: the “replacement unit” and the “expansion
unit.” Once the landlord agreed to this concept, we did a “blend
and extend” on the tenant’s existing 25,000 square feet of space,
and did a new “today” deal on the “expansion unit” even though
they were part of the same physical space. The tenant rolled back
its rents (agreed to in better economic times) approximately $5.00
per square foot on its existing 25,000 square feet, received a
refurbishment allowance for that space, and its base years were
brought up to the current years, saving significant dollars on operating and tax escalations. The “expansion space” was leased at a
very aggressive economic package (the “today” part of the deal),
including a significant amount of free rent, lower face rent, and
a full, upgraded buildout with no cash contribution from the tenant. The landlord (a REIT) booked a six year extension on 25,000
square feet, plus a new 10 year lease of 6,000 square feet, and
solidified the second largest tenancy in the building. Each side
gained something from this transaction.
In another case, my client was an 84,000 square foot collocation data center and disaster recovery center. It had 3 ½ years left
on its lease, and needed to expand its disaster recovery seating area
by 16,000 square feet. I developed a negotiating strategy whereby
we informed the landlord that we would take the expansion space,
but only if it gave us an early renewal on our existing space, which
represented more than 30 percent of the building and tens of millions of dollars of capital investment by the tenant.
It would have cost this tenant many millions of dollars to
move (and they would have had very, very few options due to
their power needs and other infrastructure requirements), and the
landlord knew that. Had we waited later in the term to exercise
our renewal option, the rental increase would have been a large
one, and our leverage would have been minimal. The expansion
space was our only leverage, and we used it to secure a very early
ten year fixed-rate renewal at a very modest rental increase, while
raising our proportionate share of the building to more than 37 per-
cent. The landlord secured a 20 percent expansion of the space and
a ten year renewal of its anchor tenant some 3 ½ years before its
lease was up. This solidified his cash flow on 100,000 square feet
for 13 ½ years. The tenant avoided a “game of chicken” and the
possibilities of either a very high renewal rent or a very costly relo-
cation, while at the same time securing more revenue-producing
space for his business.
