You've found the perfect space for your business, or maybe your space is up for renewal. In either event, you've got the opportunity to negotiate a more favorable lease. This is a complicated process that is much more involved than renting an apartment or buying a home.
In many cases, it's true that the market rate is the going rate, and if you don't rent it, someone else will. However, there's a lot more to a commercial property rental than just the base rate. Lucky for you, expenses for maintenance and improvements are often much more negotiable than the monthly rate.
All business relationships are based on a little give and take. How much your landlord will be willing to give may depend on how well you do your research. Remember, the landlord expects you to negotiate.
Here are seven tips to consider when negotiating your next lease:
Find out what property in your area is really worth.
You can review similar spaces on sites such as LoopNet, Commercial Search, City Feet, and even Craigslist. Look at comparable leases; you can gauge the market with some quick research. Before you go into negotiations, you should understand the market and how to use market values to bargain for a better rate. Try to answer these questions, at a minimum:
- What are comparable properties renting for?
- What is the commercial vacancy rate in your area?
- How long is commercial space in your area vacant?
- What other properties does the landlord own and how do those rents compare?
- Who else, if anyone, might be interested in the same property
Know the landlord's requirements.
Residential leases are a straightforward process with specific guidelines. Commercial leases are more complex. Most landlords or companies will have their own requirements. If you meet or exceed their guidelines, it gives you more room to negotiate.
Your personal FICO credit score will likely be one determining factor. However, if your credit score is lower, you can often offset it by having assets to use as collateral. Length of time in business is another factor that's often considered.
Hire a commercial real estate expert.
According to the Center for Commercial Real Estate, "Big companies, who have their own real estate department[s], in-house attorneys and multiple business locations, are used to modifying leases to their own standards and landlords are used to negotiating those changes." So the big tenants can often dictate lease terms to property owners, and owners comply as long as they get what they need out of the deal. You can hire an experienced commercial real estate broker, real estate banker or attorney to negotiate a more favorable deal on your behalf. You can often find retired senior executives through SCORE; they can mentor you through your lease negotiations for free.
Know the different commercial lease types.
There are three different types of commercial leases. A gross lease, also known as a full-service lease, means the landlord is responsible for some types of expenses. You pay the base rent, and the landlord covers maintenance costs, real estate taxes and insurance.
With a net lease, you will pay a portion of maintenance, real estate taxes and insurance costs. With a triple net lease, you are responsible for all of the property's operating expenses.
When negotiating a lease, consider the cost of rent and any added expenses found in a net lease. One of the easiest ways to compare rates is to add up all of the property expenses for the year, including rent, property taxes, etc. Then you can compare the price of a gross lease to a net or triple net lease.
Negotiate the fees besides the monthly rent
You may find more wiggle room to negotiate these beyond the basic monthly lease. These include:
- Maintenance fees: Many commercial leases stipulate that the lessee is responsible for maintenance, or tack on fees to provide maintenance.
- Common area maintenance: Otherwise known as shared facilities. Do you have access to bathrooms, parking lot spaces, cafeterias and other shared spaces as part of the lease, or is that extra?
- Utilities: Typically, you pay these. However, the question is, how is usage measured? Are you individually metered, or is there some calculation determined by square footage?
Add clauses to your lease that expand your rights.
Some clauses to request:
- Ability to sublease: If your business needs change, and you don't need all of the space, or any of the space, before your lease expires, a sublease provides revenue to cover your expenses.
- Noncompete: Particularly important for retailers, an exclusivity clause prevents a direct competitor from leasing on the same premises.
- Default conditions: Cash flow problems happen. Set a clause that if you default on the lease, you have the right to negotiate a payment plan so that the landlord can’t lock you out or initiate eviction proceedings just because of a missed payment.
Sweeten the deal for the landlord
Empty space means empty revenue. Landlords in many cases are amenable to lowering rents for longer-term commitments. Guaranteed cash flow is always enticing.
You might be able to get the landlord to lower the rent if you agree to make improvements you want to the property. On the other hand, you might be able to get the improvements you want thrown in for free. There's a long tradition of fixing the landlord's property in exchange for a break on the rent. The advantage to you is getting your priority improvements made. Whatever you negotiate, the one overriding rule is never base a lease on unrealistic or overly optimistic assumptions about future revenues.
In Entrepreneur, Julie Bennett says, "Business owners calculate how much rent they can afford as a percentage of annual sales – generally, it's less than 10% of projected gross revenues."
Try to set a budget and stick to it by focusing on your needs, not your landlord's.