When going into a commercial office lease negotiation, the odds are often stacked against the corporate clients because the landlord knows a lot about the process.
After all, landlords want to recover as much money as they can from their commercial real estate investments. They set hefty monthly rents and include critical terms that favor the ongoing management of their properties.
However, you can negotiate nearly all the terms in your commercial real estate lease. This is more important if you don’t want to make mistakes that could tank your business. Particularly, negotiating the right terms can impact your business in many positive ways:
effective commercial lease negotiation is one that protects your business needs.
the right terms can ensure the stability of location for your business.
exceptional negotiation can provide you with all the available perks such as free employee parking or wi-fi.
Even though lease negotiations may cover complicated legal documents that can carry millions of dollars in overall costs, turning the process around to your benefit doesn't have to be hard to do. We know office lease negotiation can be arduous at first, and that is why we have compiled lease negotiation tips from pro tenant reps.
1. Read Carefully
Commercial leases often involve complex clauses, large amounts of paperwork and detailed wordings that may be overwhelming for a corporate tenant. Therefore, it is essential that you read the fine print. There are a lot of things hidden in the details.
When seemingly small points are overlooked, they can easily become major concerns.
Here are a few things you may want to pay attention to:
Check that the named landlord is the owner.
Ensure your lawyer check the detailed commercial lease wordings
Also, pay attention to break clause wording
Commercial leases are not like every day straightforward transactions. The fine print contains massive information that may affect your tenancy experience.
View Non-compete clauses carefully
Non-compete clauses can be great for you if they limit other tenants, but can really limit your ability to do business when they're applied to you. For example, imagine if you were running an Asian restaurant in a retail center with a delicatessen. It'd be reasonable for the landlord to put in lease terms that prevent the deli from selling Asian foods while preventing you from serving sandwiches. However, given the popularity of Banh Mi (Vietnamese sandwiches), that clause might make you miss out on a potentially significant opportunity to increase your lunch sales.
Put it in writing
Always put your negotiations in writing. By having the details of your negotiation in writing, you are able to avoid any misunderstandings. In addition, when the landlord is well aware of what you want, they can easily respond to your requests.
Read Fine Print
One of the most important parts of lease negotiations is to read the fine print carefully. Seemingly small points can have an outsized impact on the overall economics of a lease. For instance, the addition of four small words -- "capped at 3 percent" -- to the language describing a lease's inflation-indexed annual increases could save your company from skyrocketing costs if the inflation of the 1970s and 1980's returns. This is one area where an attorney can be a useful adjunct to your broker in lease negotiations.
Use Fine Print
Many commercial real estate tenants are shy to use the fine print because their landlords act like the contract is standard and the fine details are insignificant. However, commercial real leases are usually long-term financial commitments. Hence, you want to ensure that you are using the fine print to your advantage. For instance, you can use the fine print in securing all the available perks for your business such as free wi-fi.
2. Shop Around
When you shop around, you are able to find the average market rate in the area and also discover more spaces that could be more excellent for your business.
Even if there's only one perfect space for you, the key to getting the best terms if to create competition for your tenancy. Knowing what other landlords are offering helps you to gauge what lease terms to request in your offer for the space you want. It also creates some fear of loss on the part of your landlord by letting him know that you could go elsewhere.
Identify Outside Contributors
While choosing a community, 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 money available to help fund some of the cost of your move-in, lease expenses or tenant improvements. Knowing what you can count on before you sit down to commence lease negotiations can give you a stronger position since you're able to, at least in part, negotiate with someone else's money as well as your own.
3. Do The Math
It is essential that you carefully review all the incidentals you are going to pay so as to ensure the total cost is within your budget.
In addition, it is also important to know that your rental rate will not be calculated solely on the number of the square footage you will be occupying, but also on the portion of square footage that you will be sharing with other tenants. Your landlord is going to use “Load Factor” to determine the amount of rentable square footage. Therefore, it is important to ask how the calculation is done and double-check the calculation for accuracy and fairness.
Also, do not be shy when asking for specific clarifications on any future increases in base rent and incidentals.
Look at Total Cost
To many tenants, the only numbers that matters are TI allowances and net rent levels. If they get a high TI allowance and a low rent rate, they're happy. While net rents and TIs are important lease terms, they're far from the only ones that matter. Which lease would you rather sign?
5 years, $48 per square foot rents, $15 CAMs, $2.50 annual escalations, 2 months free rent, $40 in TIs
5 years, $50 per square foot rents, $15 CAMs, $1 annual escalations, 6 months free rent, $30 in TIs
Many tenants would probably jump at the first rent. After all, it has more CAMs and lower rents.
However, if you read carefully, you’ll see that the value of the extra free rent on the second lease is well more than the value of the CAMs on the first lease.
Furthermore, while the rent on the first lease starts out lower, the average over five years is $53. The second lease's average is just $52.
4. Consider Hiring Tenant Rep
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—you should consider hiring the service of a professional broker that can help secure the best deal.
A tenant rep works solely with the tenant and provides unbiased advice. Having a commercial tenant representative on your side can improve results during the negotiations process. They understand the market, and brokers can show you hidden opportunities.
Tenant brokers have expert knowledge of the commercial real estate market. In addition, they use several proprietary tools in analyzing the market and determining whether an area or even a building is good for your business needs. Working with a tenant rep takes away the guesswork out of your market research and lease negotiation.
Tenant brokers often have the leverage of having ample experience working with a particular landlord, so they are able to know what to do to have an effective negotiation. They can also help you evaluate counter offers and let you know whether it's better to agree or continue negotiating. Best of all, brokers' fees are paid by the landlord, so you won't have to take care of additional costs to enjoy the benefits of their knowledge and experience.
5. Understand Landlords’ Perspective
Even though getting a lease is about your business needs, it is important that they suit your landlord’s terms (if you are going to have an agreement). Hence, it is essential to know what the landlord is interested in. This will help you to structure your negotiation to suit your landlord’s needs while getting terms that are favorable for your business.
6. Understand Power of Term Length
Landlords don’t want to negotiate every year. Hence, if you can offer a longer-term on your lease, they are likelier to agree to lower costs.
It is essential that you first evaluate your office space needs, so you can decide if a longer lease term is good for you. Once you have decided to go for a long lease length, you will find that landlords are more eager to listen to your offer. Opting for a long-term lease will give you much more leverage with your landlord than you'll be afforded with a shorter term. Still, you need to take some steps to keep some flexibility in your lease to future-proof your business.
7. Research Market
This is integral to your lease negotiation success. In-Depth knowledge of the current market conditions will put you in a good negotiation position. For instance, when you are able to back up your requests with current market data, your landlord will likely oblige. In addition, you may also want to find out about zoning laws in the area, so you don’t negotiate a space that you cannot use for your business.
Know the Going Rates
Knowledge, as it is said, is power. To have leverage when negotiating with the landlord, it is essential that you know what other companies are paying for similar buildings and properties in your area. This will help you to know if the quoted fee is in line with the current market rate.
In addition, ensure that you check the zoning laws for the area. Certain zoning laws may inhibit parts of your business process. Hence, ensure that you are negotiating a building in the right area.
8. Be Professional
Be professional and respectful of the landlord’s position.
The landlord wants to fill the spaces in the building. They have needs like commercial real estate tenants. Hence, 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 to make you compromise on your values.
To be professional when dealing with the landlord, follow these tips:
Be flexible and reasonable. While there may be many spaces in the market that you can choose from, when you find the ideal office space, be flexible and deal positively with the landlord.
Don’t be insulting. Always judge in good faith, unless proven otherwise. If you find inappropriate terms or wordings in the terms of the lease, call the attention of the landlord to it.
Make a counteroffer. When you see that the landlord makes an offer that appears to be ridiculous. Instead of getting angry, make an appropriate counteroffer. There is more to be won in making a counteroffer than calling out the landlord.
Think long term. If you are unable to agree to a deal with the landlord, you do not have to burn the bridge. There are future office space needs that you may have to address in the future, and it is easier to negotiate with a landlord who you have negotiated with in the past.
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.