Five Rules for Negotiating Commercial Leases

Your Bottom Line, is it important to you?  Yes, ok, then let’s see where you can increase it.  Occupancy cost is typically the first expense item we review as Commercial Brokers are at Just Elementary, Inc.  Every business has a physical cost to exist and occupy space, even virtual businesses (think server space). For  those business owners that lease the space that their business occupies, this post will cover Five basic Rules to negotiating or renegotiating your occupancy cost to improve your bottom line.  Yes, Reducing your rent should increase your profitability, or simply increase working capital, which should improve the day to day operations.

RULE #1.  Get to know your Landlord.

Which type of landlord do you have, an institutional owner, an investor group, a family group, Individual owner, or a Retiree? Once you identify which type of landlord you have, you have to assess their needs, so you can plan an approach to your negotiations.  For example, a retiree ownership is going to be looking for steady cashflow, whereas an Investor Group may be looking for a Return on Their Investment through a near term sale.  In all cases, determine who is responsible for making final decisions, and make a point to talk to them as soon as possible.  Typically, with Institutional and Investor Groups, you will be talking to intermediaries, who will slow down the process, so have some patience.

RULE #2.  Get the entire picture on your Landlord.

Figure out how much the property owners own on the property.  If there is significant debt on the property, there may not be much room for the Landlord to reduce the rent, as they are likely under pressure to make loan payments.  In these situations, the banks typically will require the property owner to maintain a certain level of lease rates at the property.  If this is the case, expect a LOT of stonewalling by your Landlord, as their hands are somewhat tied.  A couple of other key circumstances to keep in mind are: are they trying to sell the property anytime in the near future, and are there any other nearby major/anchor tenants that may be leaving that devalue the property and/or will severely harm the financial health of your landlord.

RULE #3.  Chart a realistic negotiation plan of action.

Obviously the maximum amount of the recurring lease payment that you are willing to accept is likely the first figure to for you to settle on. Also, keep in mind the CAM/NNN expenses passed on to you as the tenant, the number of option terms granted to you, responsibilities for maintenance of the property, length of the lease in terms of years, the lease assignment clause and the condemnation clause in case of eminent domain, redevelopment etc.  Carefully assess your lease situation, as there are many more points to consider.

RULE #4.  Don’t give up easily.

Negotiating with some Landlords can take a lot of time, especially if you are RE-negotiating your lease.  If you are negotiating a new lease for a new business, then you can expect quicker negotiations as you are filling an urgent vacancy for a landlord. So this is where the process diverges a bit, as the advice for Renegotiations is to STAY INCREDIBLY Persistent.  Be prepared for some stonewalling from your landlord, since you are already there as a tenant. They have less motivation to reduce your rent or accommodate any other requests you have, as they know that it is a potentially frustrating, time wasting, expensive, and risky for you to move.  There will be many request denials and delays, so be prepared a drawn out process.  It can be helpful to have third party help from a professional lease negotiator such as a qualified attorney or a commercial real estate professional who has dealt with many lease transactions.  If you do enlist the help of a professional, make sure to be on the same page with them when it comes the desired outcome.

RULE #5.  Don’t get Greedy!

Remember the final goal is to successfully operate your business venture.  So, you have to be prepared to accept and sign results that satisfy you, don’t keep pushing for more than you were happy to settle on, and risk losing the deal.  This means not skipping Rule #3.  Don’t lose focus on what is important, and that is growing your business.

For more information how Just Elementary Inc. Commercial Business Brokers can help you negotiating your new lease or a renewal for better terns, contact our Client Care Manager, Sonia Chhabra at (888) 926-9193 or by email cs@justelementary.com