So I’m meeting with our landlord tomorrow to discuss a lease extension, and I’m in the process of pulling together my thoughts on the renewal. Our office building is owned by a small group of investors, so we have a personal relationship with the owners/landlord. I consulted with several colleagues of mine, and here are our top considerations for effectively negotiating a lease or extension:
1. Be a good tenant
It’s so basic to sound business practices, but it bears repeating, particularly when you’re dealing with individuals and other small business owners. Resolve issues along the way as amicably as possible – it all comes back to you in the end.
2. Start early and understand your options
Particularly in a very tight commercial real estate market, you’ve got to allow at least 9-12 months for the process to play out. It can take several months to research your alternatives, open up negotiations with prospective landlords (especially concerning tenant improvements), and then come back to your current landlord. And you’ll want to allow 2-4 months if you have to plan a move (assuming you’re an SMBE like us).
3. Understand your market, and particularly concessions that new tenants can extract.
While market rental rates are important to understand, there are a number of other considerations new tenants may enjoy, including tenant improvements, rent holidays, and other benefits. Understanding these will not only give you a sense for what you might expect if you go elsewhere, but it can also help you negotiate your current renewal. Why shouldn’t you enjoy at least part of those benefits on the renewal?
4. Consult with (if not retain) a broker.
I’m a big believer in at least talking to experts in a field, and I generally recommend using them to represent you in a lease negotiation. Depending on the size of your business, this can represent anywhere from a $350k to a multi-million obligation over a 3-5 year period. Brokers can give you a sense for the market, current conditions, and offer other valuable input. Face it – while you may know your business better than anyone, you’re probably not an expert in commercial real estate. If you are going to use a commercial real estate broker, I suggest using a tenant only representative, as they are less likely to be conflicted than brokers who may represent either side. That being said, they are a lot like realtors in that they only get paid when a deal gets done. The good news is they are frequently paid for by the lessor, but that may affect the terms of the deal.
5. Depending on how much leverage you have, work to “share the savings”.
Just as you may want to avoid the headaches and costs associated with moving, your landlord may have the same interest. If you’ve been a good tenant and are paying near market rents, the last thing your landlord wants to deal with is several months of vacancy, showing the space, negotiating and paying tenant improvements, and then having to deal with an unknown. So work to value how much benefit each side is getting out of the renewal and see if you can’t find some common ground.
6. Think outside the box and understand your landlord’s situation.
Your landlord is interested in three things – the underlying value of the property, current income/cash flow from the property, and avoiding headaches. Understanding the relative importance of each can be very helpful in your negotiations. For example, commercial property is essentially valued at a multiple of cash flow (it’s a cap rate if you want to be specific) over a period of time, with an emphasis on future cash flows. If the landlord is thinking about re-financing or selling the property in 2-3 years, she will want to boost the cash flow in that later period. This can provide you with a path to reducing your near term rental outlays in return for increasing the rent at a time when it particularly matters to the landlord.
7. Put together a spreadsheet balancing overall costs for your various rental options
Feel free to let your landlord know you’re doing this, and make sure that you’re getting all the information you need to make a balanced and informed decision.
8. Get your hands on a bunch of actual lease agreements and extensions.
This can help give you ideas for different terms that you might want to incorporate into the lease agreement that you may not have thought of. Of course, if you have representation, you should encourage them to do this – you’d be surprised how often this is overlooked. There are lots of resources out there for looking at sample and (even more helpful) actual, negotiated lease agreements.
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