by David Eseke
Renewing a lease in a hot real estate market can be a daunting task. Tenants have seen all the indications that point to a big rental rate increase—new construction, off-market transactions, and fewer “For Lease” signs. Although landlords have been looking forward to this opportunity to adjust rental rates, tenants should also take advantage of coming back to the negotiating table. Here are three things you’re likely not asking for in your lease renewal negotiations:
1. Security Deposit Return
A return of your initial security deposit is particularly worth requesting if the landlord required extra securitization for the original lease or latest amendment. We see this quite often, particularly with leases signed during the Great Recession. Landlords require security deposits for two main reasons: 1) to pay for repairs needed upon tenant move-out, and 2) to provide extra security due to credit and/or landlord’s contribution to tenant improvements.
If a tenant’s financials have improved since the original lease, it could make the case that extra securitization is no longer needed. Or if the amortization of initial improvements is now complete, the landlord could no longer justify the need for an above-market security deposit. If fully or even partially returned, the security deposit can be turned into working capital for the tenant.
2. Cap or Cover HVAC Expenses
In most triple-net (NNN) industrial leases, tenants are responsible for maintaining the HVAC units that serve their premises. Most landlords also require that tenants enter into regularly scheduled preventative maintenance contracts with approved HVAC vendors. This is akin to getting your teeth cleaned a few times a year, which is definitely worth the cost of avoiding a cavity or a root canal.
However, the reality is, these HVAC units are not the same age as they were when a tenant moved in, unless the tenant replaced them. If a new tenant were to lease the space, it would ask the landlord to cover their exposure, given the age of the units. In the same way, renewing tenants should seek coverage by the landlord on these aging units. Here are a few ways to have it structured:
- Landlord to replace units entirely
- Landlord to warrant the units during entire lease term, and cover cost to repair or replace as needed.
- Landlord to cap tenant’s cost to repair or replace at a negotiated dollar amount
3. Sublease Proceeds
If a landlord is going to take advantage of a hot market, so should the tenant. This scenario is uncommon but could certainly be worth pursuing, depending on the tenant’s business. Most leases require that any proceeds obtained from a sublease by the tenant be returned to the landlord. Consider pushing for the tenant to receive all proceeds, or at least split them 50/50 with the landlord. In markets where lease rates are increasing at a higher rate than the negotiated rent bumps, securing sublease proceeds is a nice way for tenants to take advantage of market conditions.
David Eseke is a Director within Cushman & Wakefield’s Industrial group who specializes in representing tenants and landlords in the Great Southwest Industrial District.