Whether equipment, other business assets or even the property housing the snow removal or ice management 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 that 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 reducing 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:
- The snow removal operation is struggling,
- The local economy is suffering from a downturn, and
- The operation’s lease is expiring within a year or two.
- The leased equipment is on the verge of obsolescence.
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 business to shift to a new space or acquire new equipment, lining up a replacement 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 RENEGOTIATING
Prior to any renegotiations, finding at least three viable substitutes is essential. Requesting 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:
Are there any lease options? If yes, what is the length of the option lease or rental agreement and does it meet your requirements? Lease options are usually for the benefit of the tenant or lessee, so exercising an option instead of renegotiating a new lease or rental agreement could be more beneficial.
Is the current rent or lease amount fair? Researching payments for similar property or equipment along with taking note of incentives offered to others should be routinely undertaken. Competitive rates, terms and incentives offered as alternatives play a crucial role in any renegotiation.
Are the current needs of the snow and ice removal business the same as when the lease or rental agreement was entered into? Re-locating to a smaller space, more convenient location or upgrading essential equipment are all options to consider.
If at all possible, renewal negotiations should begin as early as possible and consideration given to what will happen should those negotiations fail. Is there a backup plan if things don’t work out? Prolonged renegotiations, expiration of existing leases or rental agreements make it essential to begin renegotiations early.
Among the most overlooked negotiating tactic 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 contractor or business owner 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:
Creating competition. Even if a snow removal business owner or manager doesn’t want to relocate or switch leased equipment, it pays to shop around and collect legitimate competitive offers that can be used as leverage in the renegotiation process.
Have the lessor or landlord give the first offer. Whether a first lease or a renewal, always resist making the first offer.
Always ask for more than needed:. Whether negotiating or renegotiating free rent, tenant allowances or other terms, always ask for more than is actually needed. If three months of free rent are needed, ask for five. If two replacement parts are required as backup, ask for four. By asking for more than actually needed, you’ve positioned yourself to strategically give and take depending on the importance of certain items to you.
Don’t forget to negotiate non-rent or non-lease issues. For tenants these include parking, signage, carpet, paint and deposit or personal guarantees that may have previously been agreed to. For equipment rentals, is on-site repairs or maintenance required, repairs or repair replacements included? As a current tenant or lessor, many of these issues will cost a landlord/lessor less to provide than finding a new tenant or lessee.
EXTENSIONS EQUAL SMALLER PAYMENTS
If a business is financially sound, it would be unrealistic of any landlord/lessor to reduce contract terms simply because market conditions, in general, have deteriorated. 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 10-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.
BUSINESS PREMISE RENEGOTIATIONS
Among the factors that should be considered when renegotiating rental agreements for the snow or ice removal operation’s shop, warehouse or other business property are questions such as:
How is the vacancy rate in the area? Before renegotiating, details may be needed. A walk around the ares will reveal the number of vacant spaces and notes should be taken of their addresses and how long they’ve been vacant.
How are the rents in the area? If they’re up, rethinking the snow removal operation’s approach to renogotiations might be necessary. If rents are down, of course, that is good leverage.
How is the traffic in the area? A business dependent on traffic doesn’t have to count it themselves. Many local business associations count foot and car traffic to measure the vitality of various districts.
How is your business? While few business owners enjoy discussing their own sales in any detail, if sales or income are down, being open about could facilitate renegotiations and encourage landlords, lessors or even lenders to work with the operation.
In today’s economy, no lender, landlord or lessor will readily agree to reducing 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 snow removal 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” answers before most renegotiations stall. A no might mean that too much was asked for to garner a response or counter offer.
A commercial lease consultant can ensure 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 snow removal and ice management business owner or manager 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 a snow removal operation’s financial statements -- as a liability.
Finally, don’t waffle when renegotiating. Know your backup plans and the condition of your 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.
Mark Battersby is Snow Magazine's finance and accounting writer. He resides in Ardmore, Pa.