Most commercial leases typically run between 5- 10 years. In good leases, there are provisions to the rental agreement allowing a tenant to extend the length of the lease. A general rule of thumb: Instead of immediately exercising your renewal option, try to negotiate each renewal term instead. However, if you come to a standstill, you should have a safety net of something already negotiated ready for your protection. This is especially true if your location is critical or if your business is difficult to move. Here are my three quick tips to negotiating this most important feature in any commercial lease:
Always negotiate the renewal clause in the original lease
The new rental rate for a renewal period can sometimes work on a predetermined basis, as mentioned above. It is more likely however that a renewal clause will state that a fair market value be used to determine a new rate. While renewing automatically may sound easy, make sure to check spaces around your area in order to get a good idea of what other spaces are going for. Knowledge of the market and comps are both key when negotiating.
Stipulate the rate from the beginning
The fair market value itself should be carefully discussed and defined. Never let the landlord try to interpret what the FMV should be. Make sure that the FMV is defined as including items such as the tenant improvement allowances or concessions you might find from the landlord’ competition. When you are able to stipulate a specific rental rate for the renewal option, you protect yourself. If the market is higher than your renewal rate, you’ve already locked in the lower renewal option rate. If the market is lower than the renewal option rate, you are still able to try and negotiate the renewal rate down.
Know how to ask
Typically, concessions (or leasing incentives) include free rent and tenant improvement dollars. Business owners are sometimes shocked to learn that these concessions are also potentially available on lease-renewal terms.
Many times, landlords tend to take their existing tenants for granted. What many long-term tenants can negotiate is the cost to acquire a new tenant. Realtor fees, background checks, and potential lost monthly rent all add up – don’t be afraid to use your long-term, immaculate renting history with your landlord as leverage.
Of course, you have to know how to ask for incentives to get them; the landlord won’t graciously offer them out of goodwill.
Consider hiring a trusted broker in your area
Even if your company is somewhat familiar with the market and rental negotiations and believe you have someone with the time to properly manage the re-negotiation- you should still consider representation through a professional services firm that can help negotiate you the best deal.
Signing a commercial lease is one of the biggest steps in a business owner’s journey. The lease agreement is filled with all aspects of rules, regulations and terms to understand during a rental relationship. And, as a business owner, your livelihood is at stake so you want to make sure you’re getting the most value for your dollar.
Fortunately (or unfortunately, however you see it), this starts with determining your rentable square footage. It’s one of the first and most crucial steps in the process. However, especially if you have a mixed-use building or a space with multiple tenants, understanding what you’re renting can be confusing.
Before you sign any lease agreement, here’s a quick and dirty lesson to know what you’re paying for and ultimately getting for your business.
Rentable v. Usable Square Footage – What’s the Difference and Why it Matters:
Simply put, Usable Square Footage (USF) is the actual space a tenant occupies. Keep in mind, this only accounts for the space a tenant is using for their business, and it excludes any common areas (for example, the building’s lobbies or restrooms.) If you’re a tenant that occupies multiple floors in a building, the USF calculation includes lobbies or restrooms that exclusively serve your floor(s).
Rentable Square Footage (RSF) is your usable square footage plus your proportionate share of the building’s shared space. So, this can be anything outside of your occupied space and that benefits you (for example, the lobbies and restrooms, mentioned above). As a tenant in a commercial space, you pay for a portion of the shared space and so your monthly rent is always calculated on RSF.
The “Loss Factor”:
When you take a look at the lease agreement, you’ll likely come across the phrase “loss factor,” “common area factor” or “add-on factor.” And – for tenants – this is arguably the single most important calculation to understand when evaluating commercial property.
The loss factor is essentially the increase in the rentable square footage above your usable square footage. You can easily break it down into three easy steps:
Step 1: Determine how much total floor area a building has.
Step 2: Subtract the shared square footage (from the total building floor area) to give you the USF. If you’re unsure of this number, just ask the building owner as they can easily provide you with the information.
Step 3: Divide the total floor space by the USF to give you the loss factor %.
What does this mean for a tenant?:
Higher loss factor percentages mean that more of a tenant’s monthly rent will be dedicated to common areas and less to the space they occupy. However, this also means that buildings with higher loss factors have many more amenities – in the form of indoor pools, spacious lobbies with conference rooms, on-site laundry facilities, chef-grade kitchens – all of which might be very appealing to some tenants. The most important takeaway here, is determining if the price per square foot matters to your business.
With any commercial real estate lease, you should always know exactly what you’re getting and what you’re paying for. As a potential tenant, pay attention to the fine print – it really matters to your business. Having the help of a trusted and experienced advisor or broker can help tremendously in these types of situations, so as a tenant, you can always be sure you’re getting a fair deal.
If you’re going into a lease or purchase, it’s important to know what you’re getting into. Check out my previous post “8 Tips and Tricks for Commercial Tenants” that can help you have a smoother transaction process.