A commercial real estate lease is second only to payroll when it comes to monthly overhead for companies large and small. That’s why negotiating the best possible lease agreement for your business is critical. It’s a reliable, predictable expense that you can build into any budget and depending on the terms of your agreement, you may be able to save enough money to afford more employees, invest in substantial marketing, or simply upgrade your employees’ workspaces when an office move occurs.
But because no lease is written the same way, there are several factors a prospective tenant needs to consider before entering the negotiation phase of a commercial real estate lease agreement. Depending on the market conditions in your area, you may have more leverage than you realize and have a better position in which to negotiate more favorable terms for your company – and that’s where a tenant representation broker comes into play.
First Thing’s First: Establish Leverage
No matter the market conditions, there’s always a way to find leverage in a real estate negotiation – and don’t think your prospective landlord isn’t searching for the same thing.
Time is a major factor. Because lease negotiations can take months – even years – to realize ink on paper, it’s important to demonstrate that you’re looking at multiple properties and are ready to move soon.
Furthermore, when touring a space, it’s important to keep your thoughts and feelings between you, your team, and your representative. Showing the landlord’s broker that you’re excited about their space will only count against your prospects. According to Jason Bollhoefner, vice president at Corum Real Estate Group in Denver, “Always have a solid backup option at hand, especially in an improving real estate market. Being prepared to walk away is a very powerful aspect of successful negotiation.”
Think in Terms of Time, Not Price
Especially if you’re operating in a rapid growth industry, there’s a reasonable expectation that your company will grow at a regular pace over the terms of your lease agreement, which is why it’s important to consider a longer-term lease at a lower rate than a short-term agreement that could cost you more in the final analysis.
But because newer, growing companies can look at long-term lease agreements with a cautious eye, try negotiating for renewal options at a regular pace. Rather than opting for a four-year lease, offer the landlord a two-year commitment with two-year renewal options that give you right of first refusal to ensure you’re not locked into a space that’s either too small, too large, or simply too expensive for your needs.
There’s also something to be said for negotiating on neighboring spaces should you grow beyond your borders. If you’re a startup or small business expecting rampant growth within the next few years, but can’t afford the amount of space needed to cover that future expansion, negotiating for options on vacant space within the building could demonstrate to the landlord that you’re serious about staying with them and won’t fly the coop once your agreement is over.
Consider Your Subletting Options
Startup companies operating in volatile industries should strongly consider their options when looking at long-term lease agreements. Should your company grow beyond the capacity of the space or shutter unexpectedly, it’s worthwhile to ask a prospective landlord about the possibility of subletting an office space you’re about to occupy.
There’s also the aspect of assignment clauses, which could cause problems should your company take on new investors. Often, commercial real estate leases include clauses that alter the terms of the lease should a change in 50% or more of the company’s ownership changes – which would void the lease agreement entirely without the landlord’s prior approval. In this instance, it’s important to be as transparent as possible with a landlord and discuss your company’s opportunity for future investment to avoid any conflicts down the road.
Think About Cost of Rent and Escalations
Most commercial real estate lease agreements come with built-in annual rent increases based on the percentage increases in the Consumer Price Index for your market, leaving you on the hook for unforeseen increases on your monthly payments. However, if you negotiate for CPI rent increases on a delayed basis, you can lock in a predictable monthly rent for your company for a few years before your overhead changes. Alternatively, you could ask for a cap on the total percentage of each year’s CPI increase or a fixed increase on an annual basis, allowing you to budget accordingly year-over-year.
Be Cautious of Repair and Improvement Clauses
Commercial lease agreements sometimes speak in broad strokes, opening tenants up to unwarranted expenses at the end of the lease – especially when it comes to any repairs, improvements, or replacements of equipment that occur during the length of the agreement. You should always negotiate for terms that dictate your company will return the property in its original condition, excluding everyday wear and tear, damage from unforeseeable accidents deemed not to be the fault of the tenant, and any alterations previously approved by the landlord. You’ll also want to get documentation of any repairs, maintenance, or upgrades conducted on the property throughout the life of the lease to ensure you’re not on the hook for expenses once you move out.
Look Out for Landlord-Friendly Provisions
Form lease agreements are incredibly common in commercial real estate, making it easier for landlords to dole out blanket provisions that benefit them rather than negotiate on key factors party-to-party. Look out for the following commonly-used provisions to help make the best of your occupancy should you decide to take the lease:
Provisions About Passing Along Operating Costs
Landlords often try to put operating expenses (with or without limit) to tenants, including property taxes and any future increases, building repairs, maintenance costs, contributions to building staff payroll, and insurance premiums. Furthermore, should the landlord sell the property, they may also try to pass along the tax increases resulting from the sale to the existing tenants.
As-Is Lease Provisions
Especially common for older properties, landlords sometimes try to pass along buildings as-is to avoid responsibility for conditions that fail to meet regulatory guidelines like environmental laws or the Americans with Disabilities Act.
While it’s understandable for landlords to protect themselves against further costs, they can often go too far and cause undue strain on the tenant. Look for provisions in the lease agreement that allow the landlord to terminate the lease at their discretion, prohibit subletting, or require a personal guarantee from shareholders or principals of the company.
Before you sign a lease for any property, you’ll want to consider the factors above in addition to the overall “feel” and tenor of the landlord themselves. If they exhibit unwilling behavior or seem overly protective of their interests without considering the needs of a prospective tenant, you may want to look elsewhere. Whatever you do, don’t go it alone – a tenant representation broker and a good lawyer should be at your side during every step of the negotiation process to ensure your company is protected.