You don’t get what you deserve. You get what you negotiate. This especially holds true in the world of real estate.
While the process of negotiating a commercial lease can be stressful for most business owners or decision makers, keeping these five factors in mind can ensure that you avoid some of the most common mistakes made by entrepreneurs:
Regardless of whether it's a landlord's market or a tenants’ market, there's always something that can be used for leverage.
One of the most important ways to create leverage is by use of time. Most leases take months to complete so avoid procrastinating when it comes to the office search. Don’t let a lack of time decide the lease terms.
Create leverage by keeping mum about feelings about the space, especially to the listing broker or landlord. This will allow the broker to do a better job negotiating.
If the other party recognizes a desire for the space and that a prospective tenant can’t select anywhere else, the other side just received some leverage. It’s always a good idea to have alternative space options at hand.
According to Jason Bollhoefner, vice president at Corum Real Estate Group in Denver, “Always have a solid back-up option at hand, especially in an improving real estate market. Being prepared to walk away is a very powerful aspect of successful negotiation.”
Tenants often become caught up in rates upon finding a space. While the rental rate is important, especially the gross rate, the term of the lease can have a more significant impact on finances.
Instead of worrying about bargaining for a few percentage points off the rate, spend time negotiating the term and thinking about the company's true needs for the future. If the wrong term is selected, the tenant will likely end up paying more in rent for a space that doesn’t work for the company than what was saved by paring 5 percent from the asking rental rate.
The length of the lease's term also affects other key variables such as tenant improvements and concessions such as rent abatement. This goes both ways. Don’t lock into a term for the lease that's years longer than initially desired just for free rent or better tenant improvement dollars. Such improvements are never free. Tenants need to understand that these costs are always baked into the lease's value by the landlord. The landlord makes the money back at some point.
Keep in mind that a broker is not a lawyer and that brokers are paid on commission. Their commission increases based on the value of a lease. While brokers are experienced in lease negotiations, they do benefit from a tenant's signing a lease and typically receive nothing if no lease is signed.
This structure, unfortunately, creates some conflicts. Paying an experienced real estate lawyer to review the lease should be a part of the negotiation process. The lawyer is paid regardless of the space chosen or even if the rental is postponed or a potential tenant walks away.
Negotiate some protections for exits should things go wrong in the future. If a tenant feels it has good visibility for the next two years but not five, try to negotiate for some cancelation clauses keeping that in mind.
Finally, don't forget to negotiate the lease. Unlike some things in life, the tenant does win from negotiating. Be creative to get needs met.
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