Should You Use a Broker in a Lease Renewal?

by Menlo Group President Tanner Milne, MBA, CCIM, SIOR

I recently had a conversation with a client who is nearing the end of a 10-year lease. I have helped him open new offices in multiple locations, but I have never worked with him on a lease renewal. As we discussed his lease, he asked me, “Should I use a broker in a lease renewal?”

I answered, “It depends.”

As I explained my thoughts, I realized other clients and colleagues could benefit from this information. I wrote up this article to answer three key questions you may have as you approach the end of your lease.

1. Is it free to use a tenant representation broker in a lease renewal?

I’ve heard some brokers who only represent tenants tell their clients that a lease renewal is always free for the tenant. This idea is based on the fact that the landlord often pays the commission fees. If you hire a broker and the landlord pays the commission, then you essentially don’t pay anything for the broker’s service during the renewal.

Many landlords are familiar with this process. They will often budget between 4 and 6 percent for commissions, but that may not always be the case. You’ll need to decide if the value of the broker’s service is worth the cost of commissions if you were required to pay it.

2. What value does a tenant representation broker add in a lease renewal?

Hiring a broker often provides a significant return on investment during your lease renewal. A broker can save you an average of five times the cost of commission fees. You may still find it worth it to hire a broker even if you end up paying commission out of pocket.

A majority of tenants renew their leases, but only a small part of them choose to negotiate their renewal. Tenants are likely to accept the landlord’s lease terms. As a result, landlords may seek higher rent rates and lower concessions during lease renewals.

By hiring a broker, you can ensure you are paying a fair rent rate. Using their expertise and resources, brokers can help negotiate a more favorable lease that can result in

• Free rent
• Lower rent rates
• More generous tenant improvement allowances

I recently helped a mortgage company negotiate the proposed 20 percent rent increase down to a 3 percent increase. We also got the landlord to throw in a few months of free rent. The landlord also covered my commission fees, making this an ideal lease renewal situation for the tenant.

3. What other benefits does a tenant representation broker provide in my lease renewal?

Not every lease renewal will result in as favorable an outcome as it did for the mortgage company. You may pay the commission fees AND end up with less than ideal lease terms. But it may still be worth it to hire a broker for your lease renewal to save your company time and stress.

Hiring a broker can provide peace of mind, as you have a market expert by your side. The broker is able to research the market, analyze lease terms and negotiate on your behalf. All the while, you are able to focus on what you do best: running your business.

Real estate is one of your business’s largest expenses, so you want to avoid paying more than you need to. If your landlord maintains rent rates or only raises them slightly, you may decide the prospect of brokerage fees aren’t worth it to your company and will sign the lease as-is. If you are confident in your ability to research the market and negotiate lease terms, you may do fine to represent yourself during the renewal. For other situations, you may decide hiring a broker will help you achieve the most favorable outcome for you and your business.

Like I said… it depends.

If you have questions regarding your lease renewal, contact a member of Menlo Group’s tenant representation team.