"Are you aware of the hidden opportunities and pitfalls in your commercial lease agreement?"
"Is your business fully prepared to navigate the complexities and hidden nuances of a commercial lease negotiation?"
Entering a commercial lease is a significant commitment for any business. Negotiating a lease can be daunting, with multiple factors to consider beyond just the rent. A well-negotiated lease can have a substantial impact on your business's bottom line and future flexibility. Here's a guide to help tenants navigate the complexities of lease negotiation.
Understanding the Market
Starting with an in depth understanding of the market is the foundation of what to expect when negotiating with any building. For example:
Current State of the Market & Specific Submarkets
Tenant or Landlord friendly
Supply & Demand
Rental Rate Trends
Market Forecasts
Notable trends in the market
Additional factors that come into play when determining leverage:
Length of term
Square footage requirement
Credit from landlords’ point of view
Alternative Options
Define Your Space Needs
Know exactly what you need from your space. There are several important factors to consider, including:
Space Utilization & Programming
Location & Accessibility
Drive Time Analysis
Budget
Importance of building Amenities
How might your needs change over the lease term?
Hire A Professional
Hiring a tenant representation firm will save a tenant a considerable amount of money, time, and resources. At WRA, we do this for a living so it’s our job to be experts on the market, negotiations, and the real estate process. We help tenants navigate the complexities of the entire leasing process and provide a turnkey approach. In tenant representation, we fight for our clients and provide all the information needed, so when it comes time to decide the tenant will have every resource at their fingertips to make a deal that aligns with the long-term business goals and objectives.
Negotiate Beyond Rent
Rent is important, but it's not the only cost to consider. Be prepared to negotiate on:
Lease Length
Shorter leases provide flexibility, while longer leases will give a tenant a larger concession package. It is important to understand current market dynamics to see what percentage of the total occupancy costs is coming back to the tenant in terms in concessions.
Since the onset of the Pandemic, concession packages have increased 2X.
Escalation Clauses
Understand how and when rent increases will occur. Consider any escalations in property taxes and Operating Expenses over the base year. In a Triple Net lease scenario, a tenant may want to consider negotiating a cap on the annual increases per year.
Improvement Allowances
This is one of the most important pieces because many businesses would prefer not to come out of pocket to build out their space. Before signing a lease, you’ll want to have a deep understanding of all costs involved in the build out, including FF&E (furniture, fixtures, and equipment). Unless instructed otherwise, the goal should include negotiating a deal that includes a T.I. amount that will cover the entire cost of the build out. Make sure there are no hidden costs before signing a lease!
Maintenance and Repairs
Clarify what is covered by the landlord and what responsibilities you will shoulder. For example, are you responsible for replacing HVAC systems or only required to have an annual maintenance contract?
Concessions
In 2023, it's essential to consider concessions when evaluating leasing options. For a comprehensive assessment of each deal's true value, understanding the net effective rental rate is key. This rate reflects the actual cost per square foot over the lease term, inclusive of any concessions. Notably, the disparity between the listed rental rates and the net effective rates is becoming more evident.
Plan for the End at the Beginning
Consider the end of lease terms. If you find that you’ve leased too much space, what are my options? How restrictive is the sublease clause? What are your obligations upon moving out? Understanding and negotiating these terms upfront will help avoid costly surprises later.
For example:
Is there a restoration clause in your lease?
Does the lease contain a relocation clause?
Read the Fine Print
Before signing a lease, carefully review every aspect of the legally binding document with a commercial real estate attorney. Carefully review the letter of intent to ensure that everything agreed upon in that document is reflected in the lease. Make sure the desired build out specifications are accurately displayed within the lease.
A successful lease negotiation should result in an agreement that not only meets your business's immediate requirements but also supports its future growth and brand image. It's important to remember that in these negotiations, almost everything is negotiable. Conducting thorough due diligence and developing a strategic approach to utilize your client's market position is more crucial now than it has been in the past two decades. The current market heavily favors tenants, with landlords offering substantial concession packages and more adaptable lease terms. Through a detailed due diligence process, we are equipped to craft and execute an effective strategy, ensuring a lease agreement that contributes to the long-term prosperity of your business.
Navigating the intricacies of commercial lease negotiation can be a complex and daunting task. But you don't have to go through it alone. At WRA, we specialize in turning lease negotiations into strategic advantages for businesses like yours. Whether the company is looking to negotiate a renewal, relocating, subleasing space or leasing for the first time, WRA is here to guide you every step of the way.
Don't miss out on the opportunity to maximize your lease terms in this tenant-favorable market. Contact us at WRA today for a consultation and let's start paving the way for your business's future success