When you have found your ideal location for your business and decide to pursue a lease on the space, chances are you’ll be presented with a typed or printed commercial lease prepared either by the landlord or his lawyer. Commercial real estate lease contracts are notoriously complex documents so always remember that negotiating a good or bad lease can often mean the difference between success and failure for your business.
Because there is so much riding on the terms of the lease document. I always recommend that you consult a professional commercial real estate broker to represent you in the negotiations. But should you decide to go it alone here are some suggestions that may help you navigate your way through the process.
The Problem: The terms of a lease document almost always favor the landlord.
The Solution: If you enter the negotiations well-prepared you can often cut a deal for favorable improvements to the terms of the lease.
Your negotiating power depends on several factors. One factor is the financial soundness of your business or concept. Landlords like to feel assured that the business that occupies their space can pay the rent, on time, and for the entire term of the lease. Remember that a lease is a “contract” between you and the landlord, and you are legally bound by its terms and conditions. And remember… in most landlords eyes, payment of the rent is the most important item.
A second factor is whether your local rental market is hot or cold. If plenty of commercial space is available, you can probably win some hefty concessions. If your area’s rental market is tight or you are eyeing a unique space, you’ll have considerably less leverage. Be aware that as of the writing of this article, the commercial rental market in the Triangle area is “THREE ALARM RED HOT”.
One item that you should focus on is the length, or term, of the lease. A short-term lease is sometimes to your benefit. Shorter leases give you more flexibility if the needs of your business change — for example, you want more space or decide that a different location would be better. There is a trade-off here, of course. A long-term lease ensures that you’ll have an affordable business space for a predictable period of time. And most landlords are not often willing to make many concessions on shorter-term leases.
If possible, try to bargain for a short initial lease with one or more options to renew — perhaps a one- or two-year lease with an option to renew for two or three more years. Typically, an option to renew gives you the right to exercise your option to stay by notifying your landlord in writing a certain number of days or months before the initial lease period expires.
If you ask for an option, expect the landlord to want a higher rent for the renewal period. The owner may also want an extra fee up front in exchange for giving you the option of staying or leaving after your initial term is up. This is a common arrangement, and if the space is important to the success of your business, you should consider paying for the option.
For many business owners the primary issue to consider when leasing space is how much rent you’ll pay. It is important to do your homework in advance by finding out what comparable spaces in the area cost. If the rent for the space that you want seems unjustifiably high, try asking for a reduction. Be aware that many landlords often won’t consider lowering the rent, but you may be able to get a few months of reduced or even free rent to compensate for your moving costs.
It is customary for landlords to include an annual rent increase in your lease terms. The increases typically start at the beginning of the second year of the lease. If the landlord insists on keeping the clause, try to get a cap on the amount of each year’s increase.
There are several types of commercial leases. The most common are Gross Lease, Modified Gross, and Net Lease. If the landlord is paying the utilities, repairs, real estate taxes and insurance costs it is called a Gross Lease. With a “Net Lease” you pay for these expenses separately — potentially a large amount in addition to the base rent.
If you’ll need lots of improvements to the space, you may want to focus your bargaining power to have the landlord provide them at no cost to you. If you’re willing to sign a long-term lease, the landlord will be more willing to pay for improvements to the property.
Although this next item is not commonly granted in a hot market like the Triangle, you can ask for the right to sublease or assign your space. That way, if you need to move out, you’ll be able to have another tenant take your space and pay the rent, without having to break the lease. Or, if you rent enough space to grow into, you can sublease some of the space until you’re ready to use it.
The items I have discussed are just a sampling of the basics of a successful commercial lease negotiation. The subject of negotiations is so complex that I could easily make it the subject of my next book. I guess you will have to wait for me to write it. In the meantime, we offer consulting services as well as brokerage…. call when you need help.