6 Lease Negotiation Tips From Pro Tenant Reps

In this article, we explore:

• The importance of scrutinizing lease details and putting negotiations in writing
• How creating competition for your tenancy can secure better terms
• Why you shouldn’t rely solely on the landlord’s calculations and should assess total costs
• The benefits of hiring a Tenant Representative to advocate for your interests
• How understanding the landlord’s perspective and offering a longer lease term can strengthen your negotiating position

Why are the odds stacked against tenants in commercial lease negotiations? 

Unfortunately, when negotiating a commercial lease, the playing field is not level between tenants and landlords. Sophisticated landlords have sophisticated brokers that negotiate on their behalf to get them the highest price and best terms. Furthermore, they have experienced commercial real estate attorneys who are obligated to draft a lease that benefits their client, the landlord.

While a commercial property owner is in the market every day, the tenant may only enter to negotiate a commercial lease once every five years.

Unfavorable clauses can be extremely costly over a lease term. However, if done right, a well-negotiated commercial lease can be one of your most efficient tools to save big in CRE dollars. A lease agreement could be one of your biggest business expenses, but ensuring the lease negotiations end in your favor, doesn't have to be impossible.

How do we know this? As Tenant Reps, we have over three decades of experience negotiating commercial leases. As such, we have included the tips you need to know to improve your portfolio and budget, including:

1. The Devil is in the Details

2. Competition is Key

3. Don't Take the Landlord's Math as Gospel

4. Consider Hiring a Tenant Rep

5. Understand the Landlord's Perspective

6. Understand the Power of Term Length

1. The Devil is in the Details

Negotiating a commercial lease requires caution from prospective tenants. Complex clauses buried in large amounts of paperwork means that there are dangerous clauses lurking in the fine print. 

When seemingly small points are overlooked in a lease structure, they can easily become major concerns.

A commercial lease agreement is not an everyday, straightforward transaction. The fine print contains significant information that will affect your tenancy.

Put it in Writing

Always put your negotiations in writing. Meaningful discussions on a commercial property lease between tenant and landlord should always be recorded in a paper trail. This brings clarity to both parties as well as documenting any agreements. By doing so, it ensures that the proposed lease is confirmed by both the tenant and the landlord.

Things that must be in writing for a commercial lease: 

1. Requests for proposal (RFP)

2. Landlord's responses for RFPs

3. Amendments to landlord's responses to RFPs based upon subsequent negotiations

4. Once a handshake agreement is reached, then a Letter of Intent (LOI)

In addition, when the landlord is well aware of what you want in your commercial space, they can easily respond to your requests.

2. Competition is Key

Don't put all your eggs in one basket. When you shop around for the perfect commercial space, you can find and leverage the average market rate in the area. Further, you also open the door to discovering spaces that could be an even better fit for your business. 

The key to getting the best terms is to create competition for your tenancy.

Knowing what other landlords offer helps you gauge what lease terms and concessions to request in the space you want. It also creates some fear of loss on the part of your landlord by letting them know that you could go elsewhere.

The reality is you don't know what you dont know. And worse, you might find out what you didn’t know later on. This is where thorough due diligence can save your company perhaps millions of dollars on your commercial lease. If you’re going alone, it's akin to preparing for a trial by reading books on law. You really don't want to do that! 

What you need is a trusted advisor on your side who is not going to have conflicts of interests by trying to represent you and prospective landlords, aka a Tenant representative. 

Identify Outside Contributors

While choosing a community, have your Tenant Rep reach out and see if anyone is there to help make your lease more affordable. Local, regional, and state governments (as well as some not-for-profit organizations) may have economic incentives available to help fund some of the cost of your move-in, lease expenses, or tenant improvements.

And just as you can create competition among landlords, you can do the same among states and municipalities for the maximum package. 

Knowing what you can count on before you commence lease negotiations can give you a stronger position.

3. Don't Take the Landlord's Math as Gospel

Who can you trust to get the job done right? Yourself (and your Tenant Rep). That's what you should take into negotiations. Check, double check, then triple check the landlord's incidentals to avoid getting taken advantage of. 

Your Tenant Rep will conduct a detailed analysis of the prospective lease's Net Present Value (NPV). They will consider the lease's items, including:

• Base rent 
• Rent escalation
• OPEX pass-throughs
• Free rent 
• Cost of additional work
• The interest rate for amortizing additional work as rent 
• The loss factor (load factor)

In addition, it is also important to know that your rental rate will not be calculated solely on the square footage you will be occupying but also on the portion of square footage you will be sharing with other tenants.

Your landlord will use “Load Factor” to determine the amount of rentable square footage. Therefore, it is essential to ask how the calculation is done and double-check it for accuracy and fairness. The BOMA( Building Owners and Managers Association) standard is the metric your Tenant Rep will utilize to calculate a fair load factor.

Ironically, although this is a building owners association, many landlords do not like having their feet held to the fire with this standard. 

Also, do not be shy when asking for specific clarifications on any future increases in base rent and incidentals.

Look at the Total Cost

When entering a commercial lease, tenants must consider the comprehensive cost over the lease term, beyond just the base rent. In many commercial leases, the most significant costs are TI Allowances and net rent levels. And while net rents and TIAs are important lease terms, they're far from the only ones that matter.

A savvy tenant understands that the financial implications extend to various elements, whether in a triple net lease or a gross lease. In a triple net lease, the tenant pays for property taxes, insurance premiums, and janitorial services, which are separate from the base rent. This contrasts with a gross lease, where these expenses are typically included in the monthly rent, offering a more predictable payment structure.

Regardless of the lease type, tenants should be aware that seemingly attractive features, such as free parking, might be offset by other costs. The real question isn't just "How much rent will I pay?" but "What is the fair price for the entire package?" This holistic approach includes scrutinizing the lease document for details like early termination clauses and renewal options, which can significantly affect long-term costs.

Another critical factor is the amount of usable space offered. A well-laid-out space that maximizes efficiency can be more valuable than a larger, poorly utilized area. Tenants should ensure they understand all aspects of the lease, including which costs they are responsible for, to avoid unexpected expenses. By thoroughly evaluating these elements, tenants can make informed decisions that align with their financial and operational needs, ensuring they get the best possible deal.

As such, take time to understand how price variations will influence your overall rent. At the end of the day, just don't leave yourself open to easily avoidable mistakes. CRE dollars have never been more important (and scrutinized).

Don't let your name get thrown around when the stakeholders are wondering how anyone missed an obvious, expensive miscalculation of commercial leasing. 

4. Consider Hiring a Tenant Rep

Your landlord has a rep... why shouldn't you??

If your company does not understand the market and rental negotiations—or doesn’t have someone with the time to properly take over the negotiation—work with a Tenant Rep that can help secure the best deal.

A Tenant Representative works solely with the tenant and provides unbiased advice. Having one on your side can improve results during the negotiation process. They understand the market, and brokers can show you hidden opportunities.

However, the worst thing you could do is offload this responsibility to a conflicted broker. Why? Many firms also represent landlords. As such, they have an interest in securing landlords (not you) the best deal. What does this mean? You will likely miss out on the best properties and leave millions on the table in negotiation. 

Tenant Reps carry expert knowledge of the commercial real estate market. In addition, they use several, invaluable proprietary tools to analyze the market. This allows you to efficiently determine whether an area (or even a building) is appropriate for your business needs.

Tenant Rep brokers often have the leverage of having ample experience working with a particular landlord, so they know how to achieve an effective negotiation.

They can also help you evaluate counter offers and leverage the value of your tenancy. Best of all, the landlord pays brokers' fees, so you won't have to take care of additional costs to enjoy the benefits of their knowledge and experience.

Tenant Representation: What You Should Know (VIDEO)

5. Understand the Landlords’ Perspective

Listen, everyone wants something, right? 

Even though getting a lease is about your business needs, you should familiarize yourself with your landlord's position. Understand that the deal must also be in their interest.  This will help you to structure your negotiation to suit your landlord’s needs while getting terms that are favorable for your business.

The landlord wants to fill the spaces in the building. They have needs like commercial real estate tenants. At the end of the day, they want to get a good deal too.

The landlord may seem unreasonable but always keep it professional. In addition, do not let your desire to secure what you think is a good deal make you compromise on your values.

6. Understand the Power of Term Length

Landlords don't want to negotiate every year. If you can offer a longer-term on your commercial lease, they are more likely to agree to lower costs.

It's essential to evaluate your office space needs. If a longer lease term is on the table, it may be in your best interest. Because a shorter lease carries less ROI for landlords.  

Thus, opting for a long-term lease will give you much more leverage with your landlord. Still, you need to take some steps to keep some flexibility in your commercial lease to future-proof your business.

How to Negotiate Your Best Lease with a Tenant Rep

It is important to keep in mind the factors mentioned above when negotiating a commercial lease. The more you strive for a win-win negotiation, the better your experience will be when you sign the lease agreement and secure the office space. Skilfully negotiating can save a lot of time and hassle in the long run. Since commercial leases are often longstanding and expensive financial agreements, there is no room for error.  

The best way to avoid negotiation mistakes? Work with a Tenant Rep. They negotiate with landlords and their representation every day to ensure their commercial lease terms benefit the tenant. 

Starting a relationship with a Tenant Rep will dramatically improve your bottom line while saving you 90% of your time (but that's not all). Learn all the benefits of working with a tenant rep.

If you're ready to start your relationship with a Tenant  Rep, you're in luck. At iOptimize Realty®, we are Tenant Reps who specialize in unconflicted, dedicated service to our corporate clients. We employ over three decades of market intelligence to secure the you the best properties and prices. This means we are empowered to have your back in negotiations with your landlord and their sophisticated teams. 

Ready to talk to a rep? Contact one today.