Negotiating commercial leases: Don’t telegraph your plans
Thursday, May 04, 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:
Negotiate the lease terms collectively: In other words, don't agree to the rental rate until you've negotiated the tenant allowance, and don't agree to the lease term (or length) until you've negotiated the Use clause. All lease terms are interconnected, and you should be negotiating with the best collective deal in mind.
Leverage the lease term into incentives: Since most lease deals are negotiated through commercial brokers or a commissioned leasing agent, the lease term is a big negotiating chip for the tenant. The agent's commission is in part based on the length of term you sign — the longer the term, the higher the commission paid. Since the agent’s commission is generally 5 percent of the base rent calculated on the first five years, you can now control his paycheck.
To that end, even if you want a five-year lease, start negotiating for three years. After the first or second round of negotiations, you may be able to leverage a lower rental rate, more free rent and other incentives by "agreeing" to take a five-year term instead of three. Additionally, most agents will get paid a 2 percent commission on years 6-10 and sometimes on lease renewals as well.
Don't telegraph your plans: A good hockey player can skate, stick-handle and pass without looking at the puck — thereby not telegraphing his plans. As a tenant, try not to speak in terms such as, "When I move in" or "I would like the carpet replaced" or "This area would make for an excellent office for me" and so on.
These are called buying signals, and they always serve to weaken your bargaining position. Don't let what you say and the words you choose work against you.
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