As an investor, there is usually an opportune time to negotiate a commercial lease with a landlord so that agreements that cater for the business requirements are adequately reached. You can negotiate with the landlord on anything like rent, lease term, renew-options and operating expenses.
Although rent is amongst the biggest business expenses, several investors poorly negotiate their commercial lease payment leading to a situation of being stuck with key hidden costs. Such costs when not dealt amicably at the earliest instance may adversely affect a company’s profitability.
Some entrepreneurs who sign whatever agreement a landlord presents even though there is an open option for negotiation. It is detrimental for a business to sign any lease without carefully reviewing it.
Worse still is that there are several, businesses which monthly rent their space without any lease. Things become worse when there is notice to leave the premises as you may lose the cherish-able renovations you left. You may also face a hard time making your bank to shield your business if you have no lease at hand.
Tips for negotiation of a commercial lease
If you want to protect your business needs better, implement some of these tips that will help you effectively negotiate a commercial lease.
Evaluate the Business needs
Do enough research before you think of entering into a lease agreement? Analyze the current and future space needs for your business to gauge your preferred location and budget needed.
In case you want to move to and out of a premise, know what you will gain and negotiate a lease that covers the needs. You may consider a short-term lease of 2 or 3 years when you are uncertain of the needs at the end of the lease term. Even if you pay more for a short lease regarding per square foot, it is easier to walk away from such an agreement at any point necessary.
- Carefully understand the costs involved
It helps to examine any incidentals to ensure the total costs is within your means. There should be a clear specification on base rent and other cost increases expected in the future. Make sure you as any changes you are unsure of what it entails.
- Make sure to involve a lawyer at all times
Getting a lawyer’s opinion at all times is crucial for the survivability of your business. In this situation, the involvement of a commercial lawyer in every lease negotiation is a recommendable action. A good commercial lawyer is one who understands leases well and does best to represent the company. There are some businesses that have a habit of using a family or general lawyer in their consultation, but this can be harmful as you may end up getting a lease that has many unexpected costs. Some even end up making numerous mistakes due to the complex nature of the leases.
- Understand available lease options
Depending on the lease type, cost usually varies enormously.
- Gross rent lease: it requires a tenant to pay a lump sum amount to the property landlord to cater for the base rent and all additional incidental costs. Incidental costs may entail- maintenance, repairs, insurance, utilities, and property tax. It also includes other common area expenses like landscaping, grass cutting, property management, snow removal, and janitorial services.
There is also a related cost, the modified gross lease, where the landlord shares with the tenant some of the incidental costs.
- Net leases: it makes it possible for investors to pay some incidentals directly. Effectively, it usually lowers the expected rent. Major differences in net leases usually occur in three forms:
- Net lease– it is the base rent together with one these expenses: insurance, utilities or property taxes. The landlord will have to cover for the rest of the expenses.
- Double net lease– it is calculated as the base rent plus other common expenses that entail; insurance, and property taxes.
- Triple net lease– it is computed as the base rent together with the common expenses like building insurance, property taxes, and utilities as well as other additional expenses such as the maintenance and operating costs.
- Percentage rent lease: it entails the base rent together with a percentage of certain gross sales. Malls and other multi-tenant retail establishment usually use this option.
- Properly research the property
Peruse and obtain any relevant information that is necessary for lease negotiations:
- Examine your buildings neighbors and tenant mix to see if they are compatible with your business. Look out whether there is any competitor around.
- Examine the nature of the building’s traffic. It may have other tenants that are using more of the parking space making it not be enough to satisfy your needs. Where other tenants utilize more of the building and have a lot of traffic compared to your business, you can choose to negotiate for lower common area payments.
- Try to approach and talk to other businesses in the local neighborhood and find out whether there are issues in the environs that can affect the business. For instance, a retail business owner will want to be aware of whether the neighborhood local foot traffic is escalating or decelerating. If there is has been a recent decline in market rents in the neighborhood, you can negotiate with the landlord to give favorable lease terms.
- Check whether the landlord has had a past negative reputation. You can inquire this information from existing tenants or realtors. For instance, you can find out what difficulties tenants have with a particular landlord that make the tenants move away from that building as soon as possible.
- Examine the market rents
Make sure you find a commercial realtor to give you an up-to-date market lease rates that are useful in making a viable decision. You can also survey the market rents in your neighborhood and compare to the one the landlord is requesting. If you have substantial information, it will be easier for you to negotiate for much lower rent in case your landlord is charging a much higher figure.
- Seek for tenant incentives
Try to ask the landlord what inducements can be offered about the available rent space. If the premise has been vacant for long, for instance, the landlord may want to entice you to rent in the soonest time. In their compassion, some landlord may provide a 2 or 3 months’ rent free period to a tenant. Others may prefer to finance part of the renovations or cover them during the lease period.
- Carefully review the prevalent termination conditions
In any lease agreement you choose to enter in, you should always examine the circumstances that may lead to the agreement termination. For example, establish what will happen to your business if the building is sold or check whether a missing rent can make you be kicked out of a premise.
Figure out how you can break away from a lease if you need a bigger space or when the sales decline. Depending on the lease type, you may be needed to pay part or all the rent. Just make sure you can understand and negotiate for better terms of the lease.
As an investor, you can check whether the lease allows for the sublease of the space. If there is that sort of provision and you notice sales decline, you could opt to sublease part of your premise to get a rent to support your business. Otherwise, you could also choose to move to another place and sublease the whole space to avoid paying hefty lease termination penalties.
- Try to negotiate leasehold upgrades
At times businesses will need some renovations to the new space to be able to operate effectively. To be able to make some leasehold improvements on the space, it is good to check whether the lease and zoning requirements permit such renovations. Likewise, check whether there is a clause in the lease that requires reimbursement of all or some of the leasehold improvements costs you incurred from the landlord.
- Examine renewal conditions
A commercial lease can either last for months or years. A good lease should have the option to renew when the term ends. For that matter, it is good to understand how and when the lease is expected to be renewed. Also, you will able to negotiate if you can be able to lease an adjoining unit for expansion purposes. A nice landlord should be able to offer you a better renewal deal when the market rates decline.
- Don’t sign the agreement quickly
At first, landlords will usually submit a lease that is favorable to them to prospective tenants. It is important to carefully peruse the lease document to check what landlord and tenant responsibilities are prescribed. The proposed lease is not usually fixed as allows room for negotiation. The ignorant tenant can rapidly sign such a lease and end up with a peril of all kinds of unexpected costs or fail to pay the remaining rent.