CONNECT MEDIA: Lease Renewal Negotiations to Create Value

By Dennis Kaiser

As published on Connect Media on September 11, 2018

The strength of the market and strong demand for quality space on the West Coast puts owners in an advantageous position to level the playing field when it comes time for lease renewal negotiations. Connect Media asked Coreland Companies’ Kindy Hohman, a portfolio manager who oversees nearly two million square feet of retail properties in California, to share insights into leasing strategies in our latest CRE Q&A.

Q: Have the priorities of lease renewal negotiations changed today?
A: The definitions of retail have changed so much over the last decade that lease renewals are a critical component to keeping shopping centers relevant and viable. In the past, a tenant’s notice to exercise the option to renew might have been good enough. In today’s market, even if the rental rate is not being adjusted, landlord’s cannot miss out on the opportunity to update original lease language, improve documentation or add a sales reporting requirement if it is not currently in place.

Q: What are some of the most common issues to address?
A: Use the negotiation to end or limit an exclusive use of the tenant or lessen co-tenancy requirements. Retail looks so different today, and landlords and tenants alike need to accept and adapt to the changes. Restricting the co-tenancy of medical, fitness or other types of services is just not realistic.

Creating retail experiences that drive traffic might require an increase common area expenses. Renewal negotiations should address CAM exclusions or “caps” to expand the rights of the landlord to use common areas of the center for promotions, further development or sales.

Q: How can a Landlord leverage sales reporting?
A: Monthly sales reporting can provide a valuable amount of insight, although this is one of the most challenging requirements to negotiate. It is the primary responsibility of the management team to make sure that this information is collected. Sales reporting gives owners the ability to foresee potential challenges and set strategies that might prevent a tenant’s closing, or more quickly find a replacement tenant.

Ultimately, consistent evaluation of tenant health and the shopping center’s tenant mix is necessary. In some situations, to see true asset growth, it might be necessary to elect not to renew certain leases and target healthier retailers.