Lease Rates

With falling commercial lease rates, how do I respond to tenant's who ask why the rent is lower on current vacant stores? Is there any law that says all spaces must be rented for the same price per square foot? Thanks in advance.
In General Area - Asked by Cindy S. - Jul 16, 2009
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Answer(s)

Chris G.
Broker/Agent
Lynchburg, VA

I would tell the tenant that when they entered into their lease agreement the market was different and they paid fair market rent at that time. I would also ask them what they would say if the market rent had increased dramatically during their lease! Would they agree to pay more? My guess is "NO". This is a common dilemma, but can go both ways. This can be applied across the spectrum of all commodities: You may have paid $100 per share for a stock that is selling for $60 now; your new neighbor may have just bought his townhouse for $50,000 less than you paid; Your bought your car when there were no dealer incentives but now they give $2000 cash back - In none of these cases do you get to "rewind"...
You can tell your tenant that they will have the opportunity to renegotiate their lease when it comes up for renewal. Unless you own the property outright, you probably have little, if any, flexibility in your fixed expenses. If this is a property that has CAM and other "pass thru" expenses that the tenants pay you could try to reduce these expenses to demonstrate to your tenants that you are making an effort to reduce their costs even though you may not be able to reduce their base rent.
PS: Let's hope they never make a law of that nature...

Jul 17, 2009
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Kelli H.
Listing Administrator
Dallas, TX

Merely that it's a sign of the times. I've had this difficult question many times in recent months. On more than one occasion the long time tenant has then requested a rent reduction as well. It's like anything though, signing a lease is a bit of a gamble, on both sides. If you sign a long term tenant now, you risk the rates going back up and being stuck in a lease getting a reduced rent when if it were vacant later it might demand a higher rate. Of course the opposite is true as well. I have a tenant up in Michigan who is in the middle of a five year lease at $2.00/sf higher than another tenant who just signed a lease with us. He's demanding a rent reduction mid-lease to bring his lease in line with current market values. I responded by saying that as the Landlord we would not be able to go to him mid-lease if the market had gotten comparatively better and demand he pay $2.00/sf more. It is what it is. Markets fall and they rise again. You must stay competitive. If you were to keep all rents the same no matter the market, you'd have a ton of vacancies for the sake of one or two tenants. That doesn't make any sense. It's like anything else, we have to adapt to the market. Someone else, please correct me if I'm wrong, but no there is no law saying that you have to lease everything at the same rate.

Jul 17, 2009
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Jim T.
Owner/Investor
Abilene, TX

It can be difficult to get people to understand this at times. Fortunately, because of the way our leases are written, I only have to answer this question at lease renewal time, and even then only rarely. All of our leases have rent escalation clauses that allow us to increase the rent every year on the anniversary date. We base our increases off of the CPI rate so that if the CPI goes up rent goes up, and if the CPI goes down rent stays the same.
Additionally, we are in possibly the safest market in the safest state, so prices don't fluctuate much. The downside though, is that inflation adjusted, we're getting less rent now than we did when we bought our buildings in the early 90s.
And no, there is no law that says each space has to be rented for the same rate. You can rent one space for $100/sf and the space nexct to it for $1/sf, just to give you and extreme example.

Jul 17, 2009
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Paul E. W.
Broker/Agent
Livingston, NJ

First, kindly remind the tenants of their protected leasehold rights during the term. Next, illustrate a scenario in which landlords hypothetically were empowered to breach the lease and escalate rents at will; thus creating an adverse effect of the tenant's projections and bottom line. Regarding price-fixing, generally the practice is illegal. For clarity and written confirmation, suggest referencing your respective State's Antitrust Laws.

Jul 23, 2009
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Loretta T.
Broker/Agent
Pittsburgh, PA

Perhaps this dilemma could be avoided with new tenants bieng offered "free rent" instead of lower rental rates at the start of the lease. Escalate the rent over the term to end at the same rate of existing tenants. For each month of "free rent" add on that number to the end of the term. i.e. 3 year term with 2 months free rent becomes a 38 month lease term. The effective rate over the term will be lower insuring the new tenant that the number is close to the existing market rates.

Jul 23, 2009
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Eric O.
Broker/Agent
Tampa, FL

Are you in danger of losing this tenant at renewal? If so, perhaps you can sooth things over by offering a blend and extend now. You get to lock in a tenant for a longer term and keep them happy. In the future, I agree with the poster above. Advertise free rent to attract tenants, but drop the advertised rate as the last possible option.

Jul 23, 2009
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Michael M.
Owner/Investor
Austin, TX

Your loan may not allow you to lower an existing tenant's rent without bank approval. Check your loan docs. The power to lower an existing tenant's rent may not be in your hands.

Jul 23, 2009
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David H.
Owner/Investor
Skyland, NC

Great answers but not always possible. We have some weak tenants that we probably couldn't collect if they default. They had a check returned NSF then asked us for a change in the lease. We gave them a non-binding 50% decrease to keep them and avoided a vacancy at a time we didn't need it. They are paying the lower rate.

Jul 23, 2009
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ed w.
Broker/Agent
Memphis, TN

During these trying conditions it is now that I would suggest a Confidentiality Agreement be inserted in both new leases, lease renewals and renegotiated leases. Default the party that blabs by rescinding TIA dollars, shortened term, reduced or abated rent or any other part of the lease the was renotiated to the tenants benefit.

Jul 23, 2009
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cornelius v.
Owner/Investor
Scottsdale, AZ

As an owner of office and industrial leased properties let me tell you want to keep your tenants. If they want a market reduction tie it into an extension of their lease. If they can show you a comparable property at 30% lower rental rates meet them half way and work in an extension. There are no replacement tenants in this market.

Jul 23, 2009
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dave a.
Owner/Investor
Phoenix, AZ

This is one of the most difficult questions for an owner/ investor, now in my 37th year. Fortunately the question usually only comes up during recessions. There is no one answer for all circumstances. What is written in the Lease doesn't mean jack. Most tenants are on the edge these days anyway. Why give them any more reason to vacate in the night. Tenant's talk and they all know, to the penny, what each other is paying. If you have a weak moment and drop your price to the existing tenents, they soon shall forget what you did for them and if you don't, they won't forget. Live by the sword, Die by the sword.

Jul 23, 2009
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Glenn W.
Developer
Tempe, AZ

Dave A. has the perfect answer...No amount of logic will permit you to get your point in evidence...It appears to me that the best rule to follow, in all economic cycles is this: Any Rent is Good Rent! meaning that it is probably best to have a unit occupied vs. vacant and unpaid, in that rental income is not like selling an item at retail which is available again tomorrow--One day lost is gone forever and the clock cannot be turned back...Keep in mind that the tenants are wrestling with the mortgage and as long as they keep winning you're ahead......

Jul 23, 2009
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William B.
Broker/Agent
Laurel, MS

I have the same problem with two centers that I manage. And yes, in these times, "any tenant is a good tenant". I have handled this by offering a reduction for short-term, one year leases, with one-year options that escalate to the average rates over 4-5 years. As for the existing tenants, I explain that the terms of the mortgage on the property will not allow me to renegotiate leases that were existing as of the date the mortgage was made.

Jul 23, 2009
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GARY W.
Broker/Agent
San Jose, CA

You may need to research the Tenant's sales and financial position and decide if they CAN remain in business without a reduction--a Lease is worthless with a Bankrupt Tenant! You may also want to do a temporary reduction untill things get better (assuming they will within a few years). Some property owners are using the market weakness to negotiate with their lenders as well. The bottom line: Things are different, and those who think the glory days are just around the corner may be dissapointed.

Jul 23, 2009
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don e.
Owner/Investor
Temecula, CA

I see a lot of response from a legalistic and contractual point of view. Good and well if one has a comfortable equity cushion is the subject property. We are located in a market that is rapidly approaching 25% vacancy. Some good friends, who are very successful equity and property managers, went to every tenant they had near the start of the downturn and offered an across the board 25% rent reduction for execution of a new lease. In this 25% vacant market, most of their properties are still rented . . . Who is ahead? Those who held to "market" rents and have a nearly unrentable 25% of those whose buildings are full of generally long-standing tenants at a lower rent? I'm inclined to think the latter . . . .

Jul 23, 2009
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Mark S.
Broker/Agent
Akron, OH

This is a terrific Q & A and very applicable in today's market. We've seen several instances of tenants asking for mid-lease reductions. Some are justifyable, some not. Typically the adjustment if honored is a trade off scenario like lowering the rent now for an extension of the term. I agree with some of the comments that Landlord's are willing to adjust mid-lease if the alternative is a vacancy. Collecting from defunct tenants is costly and difficult. I advise to try to bend just enough to keep the tenant. On the flip side when representing tenants the therory is if you don't ask you won't receive when it comes to rate adjustments. Make a solid case for it and if you are a good tenant the landlord may react favorably.

Jul 23, 2009
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Paul S.
Broker/Agent
Buffalo Grove, IL

It is tough to answer, especially if you are a fairly new owner with a fairly new mortgage. There is less margin. We manage two centers whose owner purchased one five years ago and one three years ago, both with 75% mortgages. High vacancies are to be avoided. They are a killer in attracting new tenants. At the same time, deferred maintenance disturbs both tenants and prospective renters.
Curb appeal is a must. It is better to carry tenants in this market at a much lower rent. We had a dentist providing a unique service purchase the equipment of a prior tenant -- for fully equipped, plumbed and cabineted spaces. After slow and no pay for a six month period, we let him out of the lease in exchange for the equipmed offices, front office, xray and lab. Looking for a new tenant now, but at least we have a turnkey space with no capital expenditures for a new dental team. and the huge allowances which the Landlord would have to "pay."
In these times it is better to keep the cash flowing instead of going dark. We had to drop one tenant 37% in gross to keep him alive.
But watch out for the bankruptcies, phony or not. Enforcing the leases is the starting point for negotiation

Jul 23, 2009
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Mollie M.
Broker/Agent
Irving, TX

The resonses here are excellent and reflect the broad knowledge and experience of the Real Estate professionals who have contributed. However the answers also reflect the differences in economic strength between various locations in the country, differences between class A and B&C, retail versus office sectors, tenant's industry, and personalities.
So, all great answers begin with good questions. I would try to understand the Tenant's situation and options, as well as that of the Landlord. Also, why is the tenant asking the question? Some here have "reframed" the Tenant's current lease rate, which is very smart and may be all they need to hear, some may need more.
This is no time to focus on only the deal and maximizing the short term. We must focus on relationships, time frames and develop flexible stategies. Landlords that start to view and reinvent themselves as a partner with Tenants rather than an adversary in a negotiation, will have an advantage now and into the future.
Mollie Mossman, CPA, CMA, MBA, RE Broker

Jul 23, 2009
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Commercial A.
Appraiser
Los Angeles, CA

Try researching your questions on the LOoP! http://www.theloopcse.com

Jul 23, 2009
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Brian W.
Elmont, NY

To all you greedy property owners. I've seen so many commercial properties stay vacant for months with owners making no money because they were hard nosed about ajusting rents with tenants that are struggling due to the poor economy. To Cindy S. who asked the lease rate question, sorry no loop holes for you.

Jul 23, 2009
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Mollie M.
Broker/Agent
Irving, TX

The resonses here are excellent and reflect the broad knowledge and experience of the Real Estate professionals who have contributed. However the answers also reflect the differences in economic strength between various locations in the country, differences between class A and B&C, retail versus office sectors, tenant's industry, and personalities.
So, all great answers begin with good questions. I would try to understand the Tenant's situation and options, as well as that of the Landlord. Also, why is the tenant asking the question? Some here have "reframed" the Tenant's current lease rate, which is very smart and may be all they need to hear, some may need more.
This is no time to focus on only the deal and maximizing the short term. We must focus on relationships, time frames and develop flexible stategies. Landlords that start to view and reinvent themselves as a partner with Tenants rather than an adversary in a negotiation, will have an advantage now and into the future.
Mollie Mossman, CPA, CMA, MBA, RE Broker

Jul 23, 2009
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Dennis B.
Owner/Investor
Ridgefield, CT

LETS MAKE A DEAL !
Retailers, are down 25% to 30% in many areas across the nation. It's better to reduce rent in the current market conditions than to lose a tenant. Example, tenant goes out, it takes you 6 to 8 months to find a new one, curent market rents are know lower, new potential incoming tenant wants TI or improves to space. money going out
Net Net its better to work with the Tenants. However, by law you do NOT have to. So, you my win the battle but lose the war! Think smart work with your tenaants.
RAMS RE ADVISORY SERVICES
DB

Jul 24, 2009
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Kim T.
Property/Asset Manager
North Haven, CT

I see we all share the same demise in these times. I did pick up a few good suggestions from the answers, so thank you all. I do disagree with any tenant is a good tenant......this can become a nightmare. Once you become the yes man/woman they will continue to ask for more and more ammendments.
At the end of the day your management ability and the relationship you have established with these tenants will prove to be important. Customer service can go a long way in a society that has nearly driven that concept into extinction.

Jul 24, 2009
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James B.
Broker/Agent
Newport Beach, CA

No! Commercial, retail propertie suites, buildings and locations are each unique to itself. No two are identical relative to make-up components and location which could include several factors!

Jul 24, 2009
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