Ian Portsmouth: Welcome to the Business Coach Podcast, an advice-oriented series that tackles the top issues and opportunities facing Canada’s small businesses. I’m your host, Ian Portsmouth, the editor of Profit Magazine and we’ve developed this podcast in cooperation with BMO, Bank of Montreal.
During tough economic times, all smart business owners try to reign in spending, trimming travel and entertain budgets, asking their employees to use their pencils right down to the nib end of course, laying off people who might otherwise be underutilized during a slowdown. Not many however address fixed costs and overhead, the biggest of which is often rent. If you think you are stuck in a lease set at pre-recession rates, then today’s guest has good news for you. He is Dale Willerton, Founder and CEO of the Lease Coach. It is an Edmonton-based provider of commercial lease consulting services with seven corporate and franchise locations in Canada and the U.S. Dale is also the author of Negotiate your commercial lease. Dale, thanks for joining the Business Coach podcast.
Dale Willerton: My pleasure Ian.
Ian Portsmouth: So Dale, how have commercial lease rates held up in 2009, a really though recessional year?
Dale Willerton: Not very well. As a matter of fact, I was speaking with a business owner in Calgary a few weeks ago and she had signed a 5-year commercial lease about 1 ½ year ago at $40 per square foot. She tells me that the landlord is now trying to rent the vacant units that are left in the plaza today at $28 per square foot. So, office and retail are quite a bit different but there is no question the recession has taken its toll and landlords are having to lower their rental rates.
Ian Portsmouth: So when the economy strengthens, how quickly do you expect commercial lease rates to rise?
Dale Willerton: Well, because most commercial leases are on 5-year lease terms, the cycle isn’t going to be very quick, the way it went for residential. It really varies depending on where the property was developed and what the leasing cycle is. For example, just a week and half ago, I was visiting the Don Mills Shopping Centre just north of Toronto and they had practically no vacancy, I am not sure if there was any vacancy at all partly because of their leasing cycle and when the mall opened and when the tenants signed up. It is cyclical.
Ian Portsmouth: So generally, are Canadian commercial tenants paying fair rent during recession or out of recession? I guess what I am asking here, could the average business owner by paying significantly less in rent if they just knew how to?
Dale Willerton: It is very difficult to determine what is a fair rent. You know that’s kind of the age old question. And so, it is not so much a matter of fair rent but unquestionably, thousands of business owners could be paying less rent. Part of their problem started when they negotiated their original lease, not necessarily doing their homework and knowing what to ask for and what to negotiate for. But that’s just the nature of the beast. If a business owner is not wary, you know, they sign an agreement today and they wake up on Monday morning realizing they are paying too much.
Ian Portsmouth: Now, it’s your opinion that now is a good time to renegotiate a lease, even if it is mid term and why is that?
Dale Willerton: Negotiating a lease renewal right now for a business owner makes sense because lease rates generally speaking are on sale. We are in the middle of the recession, if a tenant or a business owner has let’s say, 24 months left on their lease term, why not negotiate your lease renewal term right now. If you wait a year, a year and half and we come out of the recession, you’re going to end up paying a much higher rental rate at that time. It is just, do it now while lease rates are on sale.
Ian Portsmouth: Now, how can this happen? The whole point of a lease, it is a contract and you’re in it for a certain amount of time and if it doesn’t expire for a couple of years, aren’t you kind of stuck in that lease and if you did want to break it, would there not be penalties as you would pay on a mortgage?
Dale Willerton: The mid-term rent reduction we are renegotiating right now for tenants right across United States and Canada are born out of necessity. The landlord does not want to give a rent reduction but when the landlord is faced with potentially taking the space back and especially not having another tenant to replace the one that is on its way out, it just makes sense for the landlord to give a rent break and keep the tenant. There is a hope and an expectation that as we come out of the recession, the tenant will no longer need the rent reduction and may be able to resume paying rental rate they agreed to originally. So landlords are not giving rent reductions, you know, Zig Zigglar once said, cows don’t give milk, you got to take every drop. Well, landlords don’t give rent reductions, you got to negotiate for every dollar per square foot you can. Landlords are not giving it compassionately, they are giving rent reduction to keep the space filled with a tenant.
Ian Portsmouth: They are doing it out of enlightened self-interest obviously.
Dale Willerton: Very much so.
Ian Portsmouth: So, Dale, does that mean that a commercial tenant needs to demonstrate that they are in some kind of financial distress?
Dale Willerton: Absolutely. That’s one of the big factors that we try to bring to the table when we are working with a business owner. Providing financial statements, you know, showing the difference in the sales this year versus last year, for example. A franchise tenant contacted me just a few days ago and he said, I desperately need a rent reduction. My sales are down 60% over last year and that is information that we can provide to the landlord and then the landlord can make a decision, you know, how much they are going to help that tenant, and how long they are going to keep that tenant afloat. Because part of it is the tenant’s responsibility but if there is not another tenant to go around, the landlord is going to want to keep that tenant.
Ian Portsmouth: Now one of the golden rules of negotiation is that knowledge is power. So what are some of the key things a business owner wants to know before going into a lease negotiation?
Dale Willerton: One of the most important things for business owner to understand is the role of the Real Estate agent. The Real Estate agent who is traditionally paid a commission by the landlord is working and serving the landlord’s best interest. So often, a business owner will say to me Ian, he’ll say something like, my agent told me it was a good location or my agent made this recommendation. And I will say, “shat do you mean my agent?” I mean, are you married to that agent, why do you keep calling them my agent, because the landlord is calling them their agent. So it’s very important to understand that the agent is not necessarily going to do anything to hurt the tenant. But the agent’s job is to get the highest rental rate for the landlord, to get the biggest deposit, to get the most, you know, to get a personal guarantee, all of those things factor in, especially if the landlord is paying the agent a commission. Now, the comment you made about knowledge is power, that’s true, but that’s only a half truth. Really experience and knowledge is what it’s all about. Because knowing what to do is not the same thing as having done it hundreds or thousands of times. And so, when a business owner plans to open up a business and negotiate a commercial lease in a retail or office setting, they’re often coming up against seasoned Real Estate professionals and landlords who do it for a living. It’s not reasonable for the tenant or the business owner to think they can hold their own against the landlord or a real estate agent who does lease renegotiation every day for a living.
Ian Portsmouth: So, let’s talk about some of the good negotiation tactics that they will find in your book and perhaps you can give us three or four ways that business owners can reduce their rent. Let’s start with the idea of letting the landlord make the first offer.
Dale Willerton: Well, it is very important that if you are going to position yourself to react or to make a counter offer, that you receive the first offer. You would never walk onto a car lot and just say, I’ll give you $40,000 for that car. You expect them to put a sticker price on it, you expect them to have an asking price. So you want the landlord to make a written proposal to the tenant and then the tenant can counteroffer accordingly. Or more importantly, the tenant can walk away and see if the landlord comes chasing them. Now, a couple of points that I want to bring up is that the tenant must start well in advance. Whether you are negotiating a brand new lease or a renewal, too many tenants leave it to the last couple of months before the lease expires. You must be proactive and start 9 to 12 months in advance negotiating a lease renewal. If the landlord wants to raise your rent, do you want to find out about it one month before your lease expires or 12 months before the lease expires? You want the most time possible. The second thing that a tenant must do is create competition for their tenancy Ian. Probably, one of the biggest mistakes that business owners make is handing their lease renewal over to their landlord on a silver platter. And they do that by basically going to the landlord and say, well I have been here for 4 ½ years, I want to stay for another 5-year term, you know, is that okay with you? When they should have gone out and found other locations of other landlords wanting them to move into their plaza. It does not mean you have to move but if you are not showing any flexibility, if you are not even looking around to see if the grass is greener, your existing landlord is going to have their way with you. One third point is to ask for more than you want or expect to get. I was able to get a tenant 12 months of free rent. The first 12 months on a 5-year lease free rent. And when the tenant got over his shock and his pleasure, he said, how did you ever do that? I said, I opened up negotiation by asking and negotiations by asking 18 months of free rent. By asking for 18, I got 12. If I would have asked for 12, I might have only got 8. So you have to learn to play the game. You don’t ask for what you want or what you need, you ask for more and then you’re willing to negotiate. And the fourth point that I want to make Ian is tenants must do their homework. They must talk to their neighbours. If you are in a plaza with 25 other business owners and your lease is coming up for renewal, chances are 3 or 4 other tenants renew their lease over the last six months. If you go door to door and talk to you neighbours, you can find out what kind of deals they got with their landlord, and ideally, doing even better.
Ian Portsmouth: And is that the kind of information that fellow tenants are typically willing to share?
Dale Willerton: Oh yes, very much so. I was visiting one of my clients and I was negotiating her lease renewal in a plaza. And when I went to see her the first time, the space right next to here was vacant. When I came back to see her the second time, the space next door was leased. And so, I went in there, I introduced myself to the owner and I said, I am negotiating a lease renewal for a tenant in this plaza, would you mind telling me a little bit about your lease deal, you obviously just opened, what kinds of terms and conditions did you get? He look at me Ian, across the counter, he look at me and he said, no, he reached under the table, he pulled out his lease, he handed it to me, and he said, look for yourself. I was able to walk over to a quiet corner of the store and look at how much tenant allowance he got, how much free rent, what is rental rate was, whether he had a personal guarantee. All of that information dramatically helped me negotiate the lease renewal for my client who was right next door. This is the information that business owners must collect. They cannot sort of sit back and take is easy, because landlords are not required to charge business owners the same rental rate. When I used to work for landlords prior to 1993 when I worked for landlords, some of the properties I was managing, the tenants side by side were paying¦ one tenant was paying twice more rent per square footage than the tenant next door to them, they didn’t even know because they never talked about it. And they should have.
Ian Portsmouth: Dale, thanks for helping the Business Coach audience increase their awareness of the opportunities to negotiate leases and for sharing those very empowering tips.
Dale Willerton: My pleasure.
Ian Portsmouth: Dale Willerton is founder and CEO of the Lease Coach.
That’s it for another episode of the Business Coach Podcast. Be sure to check out other episodes, which you can download from BMO.com, profitguide.com and iTunes. If you have any comments or suggestions about the podcast, please send them to me at email@example.com.
Until next time, I’m Ian Portsmouth, the editor of Profit Magazine, wishing you continued success.