Five Steps to Negotiating a Commercial Real Estate Lease
It's safe to say that most of the general population isn't chomping at the bit to negotiate a lease-- and negotiating a commercial lease can be an even more stressful process. The average commercial lease comes with a much higher price tag attached than renting out an apartment or single-family home. There are more rules, more amenities, and more problems that need to be considered before you can even begin to reach a decision.
Fortunately, we've rounded up some of the best tips around for successfully negotiating a commercial real estate lease. Whether it's your first time to the races and you're trying to hide sweaty palms, or you're about to conduct your office's fifth move, you'll be well-served by a little common sense and thoroughness. Read on below to learn more about how you can ensure your next commercial lease works in your favor.
Five Steps to Negotiating a Commercial Real Estate Lease
Settle on budget, deal breakers, and must-haves early
Dedicating time to settling on your budget, deal breakers, and must-haves before you begin the process of hunting for property makes the decision-making process easier. If you don't have a clear understanding of what you're looking for, it's much easier to be swindled by realtors looking to make a quick buck. Lay out your convictions and the reasoning behind them early on to cement the choices you make and why.
Consider making an extra list of "nice-to-haves," too. While deal breakers and essentials are going to be more critical once it's time to make a final decision, amenities you'd appreciate (but could live without) can make for great bargaining chips once you get into the negotiation process. Things like free parking might be ideal, but you can turn that around on lots without the option and try to bargain for a lower monthly rate.
Don't overlook the small details
So many minute details go into negotiating a commercial real estate lease. We're all taught to read everything that we're going to sign before we sign it, but how many of us can honestly say we've read lease contracts word-for-word?
If there's ever a time where you take the age-old advice of being thorough, now should be it. Your lease is either a gross lease or a net lease-- gross leases include all costs, while net leases come along with costs in addition to base rent. Pour over any contracts you receive, and don't be afraid to mark them up, ask questions, and bring up inconsistencies. Be on the lookout for odd wording or rules that may break more serious regulations (or even laws).
As you look over your lease, pay careful attention to the small details that could make or break the situation later. These include:
-The length of the lease term
*Options for renewal
-Hidden costs
*Operating expenses
*Common area maintenance
*Utilities
-Termination clause
*Look for time offered to cure defaults before eviction
*Negotiate penalties for early termination
Thoroughly research comparable rents and other opportunities
The best way to negotiate prices is to know the market around you. Before even setting out to look at potential properties, you should have a solid understanding of comparable real estate options, rents, and other opportunities nearby. This will allow you to come closer to having the upper-hand when it's time to finalize lease pricing.
One other thing to keep in mind is that, often, your first year's rent will be lower than your rent in the future. This is because most landlords offer lower rates to entice lessees; there's a good chance that you'll experience annual increases in rent going forward. If other nearby properties offer caps on annual increases and the landlord of your ideal property doesn't, cluing them in to what you know could open up opportunities for you to put caps in place.
If rent is too high, try asking for a longer lease term
Sometimes, the ideal property comes at too high a cost, but that doesn't mean that you need to relinquish hope and begin looking elsewhere. There's no harm in asking the property's landlord whether they'd consider reducing the rent in exchange for a longer lease term. This can be an especially easy question for lessees to ask if they know they'll be in one spot for a while.
Keep in mind that your end goal should always be to achieve maximum benefits with the minimum possible lease length. This does not mean that longer lease terms should be avoided; it merely means that you should never forget the value that comes along with not being stuck in a single place for too long. If you're comfortable trying for a longer term, great-- just don't lose sight of the fact that longer terms have their drawbacks.
Negotiation can be nerve-wracking, especially if you haven't got much experience in the realm that you're working within. Taking the time to educate yourself about the commercial real estate market before setting out to snag a property is essential; and, once you've started the process of finding the perfect lease, you'll need to dedicate yourself to assessing every detail that's put in front of you. If you're willing to do that, you increase your likelihood of snagging a favorable deal tenfold.