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The Benefits of Starting Early & Why Renewals Aren't Easy
It's October 2014. Tailwind Capital has nearly three years remaining on its lease. Their current space works for their business needs and can accommodate its near-term growth. No problem, no solution. But is that so?
Despite having time, Larry Sorrel, Managing Partner, and Sean Gagnon, CFO, agreed to meet in October 2014 because the tower floors (20 to 32) of 485 Lexington were in a very interesting position; specifically, 10 of the 12 floors had leases expiring in 2017 or sooner. SL Green, the landlord, was aware of this upcoming exposure and we felt as tenant advisors there could be an opportunity to engage them early. Regardless of its current lease expiration, the Tailwind team understood that knowing this information was only to its advantage.
My partners, Ben Friedland and Mike Movshovich, and I officially began working with Tailwind soon after in April 2015. Again, Tailwind's lease was not up until 2017 and for a firm of their size, there was no need to engage the market for another 12 months. So what did we do?
First, we brought on an architect, Ted Moudis & Associates, to help Tailwind determine its future space needs in either a renewal at 485 Lexington or a relocation outside the building. We then toured 10 buildings on two market tours and ended up shortlisting a partial floor at 1120 Avenue of the Americas. This floor did not become available until October 2016, and despite us being in the market early relative to when Tailwind's lease was expiring, we would have been able to negotiate enough free rent on this space to avoid any double rent period should Tailwind have wanted to pursue this option. Therefore, we developed a credible threat of relocation, which is crucial to do when executing a renewal.
My friends sometimes ask me if we as brokers are paid on renewals. When I answer yes, they are surprised. "Aren't renewals super easy?" they ask. In fact, it's the opposite. Renewals are oftentimes harder to complete than relocations because in a renewal, both the landlord and the tenant have a lot to lose. In a relocation, the tenant will incur capital costs to build out their new space or even if they move to built space without improving it, there is a cost for furniture, fixtures and equipment ("FF&E"), moving, and overall business disruption. If a tenant relocates, the landlord will likely have to incur months of downtime before the space is released, have to give a market concession package (free rent & tenant improvement allowance) for an incoming tenant and also possibly need to pay for infrastructure upgrades (e.g. new common corridor, bathrooms, etc.)
We ended up submitting one proposal to 1120 Avenue of the Americas and an offer to extend at 485 Lexington. Tailwind had a renewal option in its original lease however given the tower floor exposure, we felt we could negotiate a better deal with more concessions by negotiating outside of the renewal option. Therefore, we did just that. In total, we spent 3 months finalizing a term sheet which led to a relatively seamless process once the lease amendment was issued.
In finalizing the lease amendment, Tailwind is able to get a capital improvement allowance from SL Green today to improve their space, however the new lease (with new economics and base years for operating and tax expenses) does not begin until the summer of 2017. It was a long process from start to finish – October 2014 to June 2016 – but time allowed Tailwind to fully understand its options and make an educated real estate decision based on its current and future business needs. Our deal was the fourth transaction to close in the tower of the Building and proved to be a great solution for the firm going forward. It's never too early to be informed, and the Tailwind team saw the value of that firsthand in this renewal.
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