5 Keys in Negotiating an Office Lease
People don’t get what they deserve. They get what they negotiate. This is especially 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 help entrepreneurs avoid some of the most common mistakes:
1. Find leverage.
Regardless of whether it's a landlord's market or a tenants’ market, something can alsways be used for leverage.
Create leverage by using time. Most leases take months to complete so avoid procrastinating with the office search. Don’t let a lack of time decide the lease terms.
Create leverage by keeping mum about any feelings about the space, especially to the listing broker or landlord. This will enable the broker to do a better job negotiating.
If the landlord's side recognizes a prospective tenant's desire for the space and an inability to choose anywhere else, the owner just received some leverage. It’s always a good idea to have alternative space options at hand.
“Always have a solid back-up option at hand, especially in an improving real estate market," said Jason Bollhoefner, vice president at Corum Real Estate Group in Denver. "Being prepared to walk away is a very powerful aspect of successful negotiation.”
2. Don’t think rates. Think term.
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 lease's term and thinking about the company's true needs for the future. If the wrong term is selected, a 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.
3. It's never true that a tenant gets anything free.
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.
4. Arrange for a solid legal review.
Keep in mind that while they are experienced in lease negotiations, brokers are not lawyers and are paid on commission. The commission increases with the value of a lease. Brokers do benefit from a tenant's signing of a lease and typically receive nothing if no agreement is reached.
This structure, unfortunately, creates some conflicts of interest. Paying an experienced real estate lawyer to review the lease should be a part of the negotiation process. The lawyer is paid regardless of which space is chosen and even if the rental is postponed or the potential tenant walks away.
5. Negotiate protections for an exit.
Bargain for some protections for exits should things go wrong in the future. If a tenant feels that he or she has good visibility for the next two years but not five, it's worth trying to negotiate for some cancelation clauses.
Finally, don't forget to negotiate the lease. Unlike some things in life, the tenant does win from negotiating. Be creative in order to get needs met.