Understanding Commercial Lease Renewal: Key Considerations

Understanding Commercial Lease Renewal-Key Considerations

Several key considerations for commercial lease renewal can help determine whether a commercial lease should be renewed. In this article, we share some of those. Anything from the property value to the tenant’s payment history can inform your decision. You should carefully consider each before concluding.

1. Look at the Market Value

A landlord can refuse to renew a commercial lease on most grounds. In most states, they don’t even need to give a reason for their decision. Tenants may have unknowingly waived their right to stay in their original contract, as well. Although you may have more specific legal considerations to deal with, there’s likely nothing stopping you from moving on.

The value of your property may have increased during the lease period. The resident may choose not to stay if you significantly raise your rates. From their perspective, they gain nothing from paying more to receive the same level of business. Still, they may simply be waiting for a market decline to gain more leverage during negotiations. Consider how much others in your area charge and how your tenant will react to an increase.

2. Check for Overdue Payments

You should consider denying a commercial lease renewal if your tenants regularly have overdue payments. While giving them some grace is reasonable because of the pandemic’s effect on brick-and-mortar companies, you can’t effectively operate with broken revenue streams.

Most organizations limit the payment period of unpaid invoices to 30 business days, making them outstanding. After that time is up, they become overdue. A lack of income can affect your business operations. Sending reminders or negotiating extensions might be the best thing you can do at first, but choosing not to renew the lease is a good option if it keeps happening.

You can also consider leveraging technology to make your decision. For example, artificial intelligence can manage investment risk using datasets. It could cover the historical payment behavior of commercial tenants in the area to determine if a renewal is your best option.

3. Know Management Challenges

Tenants may decide not to renew because of property management issues. For example, slow responses to maintenance requests could make them feel better off at a different location. At that point, you must consider what changes they require to determine if you should proceed with the commercial lease renewal. Can you make the changes in time to make them stay?

You may need to consider alternatives to keep them if they’re displeased with the current management state. Automating your services may help convince them. For example, our rent management software can inform you of lease escalations, display trends in your financials, keep investors in the loop and manage all your properties in one place. Since the impact of a digital solution is quantifiable, they could trust you to improve.

4. Cover Negotiations

Some people want to renew their lease because it gives them more room to negotiate a tenant improvement allowance. They can benefit from not paying out of pocket to upgrade their space. It also makes more sense to build on their current location rather than moving and starting over. Typically, they have more leverage when coming to you early to discuss staying.

The changes are usually structural or cosmetic, and you agree on the amount of funds in the lease renewal contract. While it benefits the tenants, you also can get good outcomes from the experience. Most improvements they make will be built in, meaning they can’t take it when they leave. Eventually, you’ll be able to increase your rates because of the upgraded space. In addition, they may be more inclined to stay longer since they put in work, providing you with more security.

5. Determine Scalability

Tenants often must consider whether they’ll renew their lease based on scalability potential. Their operations may have significantly expanded since they started out, meaning they need more room to grow. They might be looking for alternative real estate.

Consider working it into a renewal agreement if you have additional space for them. Having them in multiple properties can benefit you if they’ve been great tenants. You may have leverage during negotiations since keeping them in the same location is also advantageous for them. They won’t have to deal with moving and consumers will likely stay loyal to a familiar site.

6. Understand Availability

The real estate market is one thing to consider during a commercial lease renewal. Beyond rate increases, you must factor in the availability of alternative tenants. For example, the pandemic significantly lowered office sector investments while increasing the value of logistics and industrial real estate. Does your property have other interested parties?

If not, you may be in-between commercial tenants for a while. Even though a vacancy is manageable, keeping a stream of revenue from your current ones may be ideal. Consider the market’s opportunities and the challenges of an empty space before your commercial lease renewal.

Make a Renewal Decision

Deciding whether or not to renew a commercial tenant’s lease depends on their history at the location and intent moving forward. It also relies on their willingness to stay. You may have to make changes like switching to rent management software or offering an improvement allowance to incentivize them. A new contract is an excellent opportunity for both parties to benefit, so you should take a while to review your options before deciding. It is always good to remember key considerations for commercial lease renewal since they can make your commercial lease renewal decisions easier.

Other blogs you may like

Search

Table of Contents

Subscribe to Our Blog

Join thousands of commercial real estate professionals staying up-to-date with the latest best practices for the industry.

QuickBooksLogo1.png

At least one Intuit QuickBooks connection is required to use STRATAFOLIO.

Take advantage of our affiliate discount for US and Canada.

Get your QBO discount today!

Commercial Real Estate Software for QuickBooks Users

Talk to an expert about the time-saving benefits of using the top-rated commercial real estate software designed specifically for owners and managers who use QuickBooks.