By Mark E. Battersby / Published August 2018
Whether for equipment, other business assets, or even the property housing the pressure cleaning operation, lease and rental payments are frequently one of a business’s largest recurring expenses. While nothing can be done about the impending necessity to reporting leases on the operation’s financial statements, unlike many other fixed costs, commercial leases are often negotiable.
Both landlords and equipment lessors are aware that a reliable tenant or lessee who consistently makes payments on time is in the best position to renegotiate leases and rental contracts. Obviously, no lender, lessor, or landlord will agree to reduce a financially strong tenant or lessee’s rental payments unless, of course, the restructured agreement will create an economic advantage for the landlord or lessor.
There are three situations where it might make sense to approach landlords and/or lessors:
Specialized equipment leases and rented property located in an area with high vacancy rates offer excellent opportunities to renegotiate and reduce payments.
Since every landlord and lessor is fully aware that it takes time for a pressure cleaning business to shift to a new space or acquire new equipment, lining up a replacement location should be the first move in renegotiating. Taking the time to research before approaching the current landlord or lessor can save money in the long term.
Prior to any renegotiations, finding at least three viable substitutes is essential. Request simultaneous proposals from the current landlord/lessor and at least three others that would be good fits. It goes without saying that all requests for proposals should be taken seriously. Even when perfectly content with the current leased business premises, equipment, or other business assets, those alternatives may become important if renegotiations get ugly.
Here are a number of factors to consider before renegotiating:
If at all possible, renewal negotiations should begin as early as possible with consideration given to what will happen should those negotiations fail. Is there a backup plan if things don’t work out? Prolonged renegotiations and the expiration of existing leases or rental agreements make it essential to begin renegotiations early.
Among the most overlooked negotiating tactics is the failure to develop alternatives. Once a landlord believes that a current tenant is planning to renew, that tenant immediately loses his or her negotiating leverage, leaving the landlord or lessor in control. Every pressure cleaning contractor, equipment dealer, and supplier should develop a plan “B,” “C,” etc., in the event they choose not to accept what the current landlord or lessor is offering. This will allow entry into the renewal negotiation in a position of power.
Research and multiple alternatives obviously play an important role in both negotiation and the renegotiation process. So, too, do tactics such as the following ones:
If a pressure cleaning business is financially sound, it would be unrealistic of any landlord/lessor to reduce contract terms simply because market conditions, in general, have deterioriated. There is, however, the so-called “trading dollar exception” where the landlord/lessor—with the permission of their lenders—agrees to a payment reduction. This allows a creditworthy tenant or lessee savings on its payment obligation for the duration of the current lease term by reducing the amount of space leased or simply reducing the payment amount.
These agreements usually require a tenant/lessor to agree to extending the lease or rental agreement for a five- to ten-year period at a rate equal to a projected market rate which almost everyone expects to be higher in the future. Obviously, this practice will only result in short-term savings while requiring larger expenditures in the long run.
Among the factors that should be considered when renegotiating rental agreements for the pressure washing operation’s shop, showroom, office, or other business property are pertinent questions:
In today’s economy, no lender, landlord, or lessor will readily agree to reduce a financially strong business’s rent or lease payments unless, of course, the restructured agreement provides the other party an economic advantage. Fortunately, there are situations when such economic benefits are possible, which can turn out to be a win-win for all parties concerned.
Putting forward a renegotiating position backed up with facts, such as a negative local economy, the pressure cleaning operation’s declining sales, etc., while looking for ways to increase the size of the pie—what the business can offer the landlord or lessor in return, like longer, better, or more rewarding terms—can ensure success. And, remember that it often takes three “no’s” before most renegotiations stall. A no might mean that too much was asked for to garner a response or counter offer.
A professional commercial lease consultant will ensure that the landlord or lessor is aware of the options available to the business without creating an adversarial relationship. They will ensure deadline awareness and provide the negotiating leverage needed to achieve the best and most economical terms. Remember that tenants and lessors don’t get what they deserve; they get what they negotiate.
Market conditions can change rapidly, and a well-informed contractor or business owner should continually strive to ensure they’re getting the best deals possible. Obviously, attempting to renegotiate without a clear reason for doing so or while already having favorable terms shouldn’t be undertaken. In other words, don’t mess with a good thing just for the sake of it.
Also, keep in mind that the new accounting rules that become a reality for publicly-traded companies next year and for others in 2020 will require all leases to be included on the pressure washing operation’s financial statements as a liability.
Finally, don’t waffle when renegotiating. Know your backup plans and the condition of the pressure cleaning business. If the business is going to fail, moving to a new location or not getting better rental terms isn’t going to have much of an impact but does provide yet another negotiating point.