“When is the right time to negotiate my lease,” is one of the most common questions when it comes to commercial real estate. The answer is simple: now! A company’s business should fuel its real estate needs, not the other way around. The real estate should support the business.
A common misconception is that a lease is set in stone once it’s signed and it can never change. A lease is a more flexible document than people realize. This contract can constantly be amended and improved during the lease term. All that is needed is proper negotiation and leverage with a landlord.
“What about when my lease expiration date is approaching?” many ask. “When should we start looking or negotiating for a renewal?” The the time frame is the same whether you are looking to relocate or renew. Start now! The more time you have, the more you are able to retain the potential for relocating, giving your business leverage in a renewal negotiation. With all of the implications of relocating, the process can take 8-12 months. In a negotiation, the more leverage you have the better. After All, everyone wants their business to have the best lease possible.
Give yourself the upper hand in a lease negotiation by approaching your landlord at least 8 months before your lease expires. Time is a tenant’s strongest leverage, along with competing offers. It’s best to give yourself a minimum of 12 months to begin researching the market for competitive offers. The sooner you approach your landlord, the better lease you will get.
1) What is “Additional Rent,” and how is it affected by the lease type?
Your rent is calculated from two subfigures: base rent and additional rent. Base rent is the rate of payment that allows the tenant to possess the subject premises. Any other charges beyond the base rent are known as additional rent. The amount of additional rent is heavily affected by the type of lease your landlord quotes. Depending on the lease, the additional charges can pile up on an unsuspecting tenant.
There are four essential lease types:
Full Service Gross (FSG): Operating expenses, property tax, and insurance are all
included in the base rent. The landlord provides utilities and janitorial services as part of operating expenses, however, if these services exceed a set amount, the landlord incurs a fee. This lease is typical for multi-tenant offices and is often quoted as simply a base rent.
Modified Gross/Industrial Gross (MG/IG): These leases operate like an FSG except it’s usually up to the tenant to contract utilities, janitorial, and sometimes even trash. The landlord is responsible for common areas and structural issues. The tenant may be obligated to take care of certain maintenance on the premises. If total building costs exceed a set amount, the tenant is charged a fee. Like FSG, this lease is often quoted as just a base rent.
Net (N): Similar to the MG/IG, net leases specify the additional fees as part of the base rent quote. If the quote states 30$ per square foot net electric, the tenant must also cover electricity costs.
Triple Net (NNN): This lease requires the tenant to pay a proportionate share of the three “nets”: operating expenses, taxes, and insurance. Additionally the tenant must contract utilities, janitorial, and trash services. If it’s an industrial lease, the tenant is fully responsible for maintenance (painting, structural repair, parking lots, etc). If it’s an office lease, the landlord will take care of the common areas and pass the fees onto the tenant’s proportional share. Like a single Net lease, a Triple Net quote will be base rent plus NNN fees.
2) Should “Build-Outs” be in my contract? Who pays for the build-out?
Build-Outs are required when the leased space needs to be upgraded or remodeled for the tenant’s commercial needs. Due to the major expense of any construction on a space, this is something that should be a part of the lease. The landlord can negotiate either a turn-key build-out or a flat dollar allowance in order to pay for the modifications.
Turn-Key Build-Out: Here the landlord will cover the entire amount of the build-out. When the landlord does agree to this, rent will often be adjusted (raised) for the possibility of steep construction costs
Flat Dollar Allowance: The tenant can liken this to a construction budget. A flat amount of money will be allotted to the tenant by the landlord. Any incurred costs that exceed the allowance will be the responsibility of the tenant.
3) How is my rental rate determined? The cost of a space is determined by several extraneous factors. Whether the market is down or up, square footage is the only really reliable way to gauge your rental fees. Office and retail spaces are calculated on a per square foot/per year basis. Industrial rents are usually per square foot/per month.