Negotiating commercial leases: Calculating market rents
Thursday, September 07, 2017
For many commercial tenants, negotiating a good lease or lease renewal against an experienced agent or landlord can be a challenge. While an entrepreneur focuses on marketing and managing, savvy real estate agents and brokers are specialized salespeople. Their job is to sell tenants on leasing their location at the highest possible rental rate.
Tenants may go through the leasing process only two or three times in their entire lifetime — yet they have to negotiate against seasoned professionals who negotiate leases every day for a living. Negotiating appropriate leasing terms is vital for a business owner as the amount of rent he pays will directly affect the company's financial bottom line.
Whether you are leasing a new location for the first time or negotiating a lease renewal for your business, here are three money-saving tips for commercial tenants:
Ask for more than you want
We remember a tenant coming to us hoping we could negotiate a $500-per-month rent reduction for her business. During the ensuing months, we met with the landlord and insisted upon a $1,000-per-month rent reduction. Following some negotiation, the landlord finally agreed to an $800-per-month reduction (approximately 25 percent less).
Ask for more than you need or want when negotiating other terms as well such as free rent, signage, parking, leasehold improvement money, etc. The worst the landlord can do is say "no."
Calculating market rents
Landlords and their leasing agents will often justify their asking price per square foot as market rent or the prevailing rent (or the "going rent" in that specific neighborhood). Commercial space today is leased out much by category — daycare centers will pay less than pharmacies, which pay less than hair salons and so on — therefore, this claim of market rent doesn't always apply.
Don't be fooled. Many commercial lease deals we negotiate for tenants end up coming in well below the so-called market rents.
Define the use clause
It is extremely important that the tenant's use clause be fully defined within both the offer to lease and the formal lease agreement, to include every product or service you will be selling and every product or service you plan to sell in the future. For example, a hamburger stand tenant may expand his/her menu to offer hot dogs, or a massage therapy tenant may add a tanning bed for his/her clients.
Remember, exclusivity on your use clause is also important — meaning that you and another tenant are not both offering the same product line and competing with each other.
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