Welcome to “How to Re-Negotiate Great Terms for Commercial Real Estate”.
One of the best opportunities to lower expenses and improve margins in your business is when you are renegotiating your commercial lease terms. Renegotiating terms can be tricky if you are uninformed and unprepared. However, with a knowledgeable and experienced broker on your side, renegotiating – especially in this market, can be one of the best decisions for your company.
The goal of renegotiations is to get the best possible commercial real estate deal for your needs.
What Does It Mean to Re-Negotiate Commercial Lease Terms?
Since unnecessary expenses can hold your business down, you have to make sure that your commercial lease terms are optimal to fit your company budget and growth rate.
Fortunately, there are many successful ways to re-negotiate a commercial lease and benefit from better terms. So, if you are looking for advice on how to effectively re-negotiate commercial lease terms, you have come to the right place.
In this post, we suggest some of the best ways to get better terms upon renewing a commercial office space lease.
A commercial lease is a contract that is binding on the tenant and the landlord. There are a number of reasons why you might want to renegotiate the commercial lease:
1. Your market or business has undergone significant changes
2. You had to close your office space unexpectedly
3. Your landlord does not uphold the terms of the lease
Tips to Re-Negotiate Terms for Office Space
Although the landlord will likely try to gain the upper hand when renegotiating the terms of the lease, here are some key factors that should be considered before engaging in negotiations of your current space.
Understand the Costs
The first thing that you need to do when you decide to re-negotiate terms for office space is to determine your costs. You must carefully review all the incidentals that you have to pay.
This will ensure that the overall expenses of the company don’t exceed its working capital. Go through your budget – line by line, to find out how much of an increase in rent you can potentially afford or what the ideal reduction in rent would be. . Understanding these costs is the starting point for your re-negotiations.
Revisit the Terms of the Existing Lease
Next, you have to look into the terms of your existing lease to ensure that you know which terms need to be renegotiated. Generally, most landlords prefer keeping commercial tenants for a long time. The reason behind this is that tenant turnover is costly and can leave units vacant for months while repairs and other unit upgrades are occuring.
You have to understand that your landlord is navigating the same market conditions as you. Therefore, revisit the lease terms and discuss the issues you face in terms of rent payments, the lease term, and potential improvements.
Involve a Lawyer
If you fear that your landlord is making it difficult for you to re-negotiate terms for your space or is taking advantage of you, it might be best that you involve a lawyer to review the legal terms of an agreement. It is always a good idea to get a lawyer’s opinion when renegotiating a commercial lease. Keep in mind that attorneys typically do not know what fair business terms are, like rental rate, free rent, tenant improvement dollars, escalation or securitization. But they will know the legal terms that are fair.
There are many intricacies to leasing that require expert knowledge to navigate. Hence, it is in your best interest to consult with a lawyer to ensure that you know exactly where you stand; and that you understand what you can and cannot ask for in negotiations. In fact, the lawyer should be able to accompany you when you renegotiate commercial lease terms. This will discourage the landlord from exploiting you.
There is a lot that a lawyer can do for you, such as request reasonable changes to the lease on your behalf to ensure that it reflects the current market conditions. It is important that you leave emotions out of the process. This is why having an expert by your side would allow for smoother re-negotiations.
Request for Partial Rent Abatement
Most businesses have experienced changes in income due to changes in consumer behavior, seasonality or government mandates. This is why it might be possible for the landlord to consider accepting rent on partial payments. In order to reduce the burden of rent temporarily, rent abatement might serve as a short-term solution in re-negotiations to reserve capital, sustain a healthy balance sheet, and maintain flexibility.
Check Market Rents
The next tip that you should consider is reviewing market rents. You need to know how much other businesses are spending on office space in the current market. It would allow you to compare the most recent market rents in different areas and prove to your landlord that you are asking for reasonable lease terms based on where the market currently stands.
Speak with a commercial broker to obtain updated market lease rates. You can use this information for negotiating a lower rent in case the asking figure seems to be high. After all, market rents should dictate how much money you spend. Your landlord should not charge more than the market rate of comparable spaces and locations.
Research the Property
In addition you also need to research the property to find out if there is something that you can use to your advantage when you re-negotiate commercial lease terms. One way to do this is to inspect the property to see if it still meets the building codes. You can check the amount of debt owed on the property or any recent new tenants or tenants that have vacated. You can also look into the parking spaces alloted and if it is sufficient for your needs.
If there is a lack of parking space, you may be able to renegotiate a lower rent. Moreover, you should also get in touch with other businesses to find out more about the neighborhood and if its value is shifting.
It is also a good idea to learn more about the reputation of the landlord. The landlord’s reputation can greatly affect occupancy rate, and could potentially give you the upper hand in negotiating better terms.
Evaluate the Termination Conditions
When it comes to re-negotiating a commercial real estate lease, you also have to look into the termination conditions. Check the situations where each party has the right to terminate the contract. It might be possible that the lease might entitle the landlord to ask you to leave if you miss a rent payment.
Similarly, you should know what happens in case the building gets sold. Also, you should know how you can expand the space if your sales increase.
There are many termination conditions that you have to look into, including the option to sublease the office space. If your sales decline significantly, you might even need to relocate your business. In such a situation, you should be able to sublease the entire space to pay for the lease without incurring a termination penalty.
Consider Leasehold Improvements
Every office space needs to be renovated from time to time. The lease should permit you to proceed with your desired leasehold improvements. If the landlord is unable to reimburse you for necessary improvements, you should be able to take action. This is why it is vital that you go through the leasehold improvements clause. Otherwise, you could end up in a difficult situation if major renovations are needed.
Successful re-negotiations require patience and effort. They tend to be time-consuming and require you to look outside the box. Establishing a strong relationship with your landlord also helps as it allows you to add a human element to the entire process.
If you struggle to reach an agreement with the landlord, you will have to consider subleasing, as it would ensure that you are able to make the lease payments.
For the best results, you will need to hire a broker. Hiring an experienced and trusted commercial real estate broker will help you maximize your re-negotiations and get you the absolute best terms in the market.
Contact Tenant Advisory Group before starting your re-negotiations. Our dedicated team of real estate professionals make sure that re-negotiations are straightforward, tenant-friendly, and cost effective for the short and long term of your business.
Have questions about “How to Re-Negotiate Great Terms for Commercial Real Estate”, leave a comment below.
Also read: “Chicago Office Space Trends – How to Design Your Office for Returning Employees”