Rent is one of the biggest fixed expenses for any small business owner. Luckily, there are many opportunities for potential tenants to negotiate and save.
In most instances, the landlord likely will dictate the overall terms of the lease â whether it's a gross lease that includes all costs; a net lease that requires tenants to pay expenses such as taxes, maintenance and utilities; or a hybrid of the two. However, the fee schedule and rent are usually negotiable on a net new lease.Understanding leasing terms and the different types of space available is critical.
"If it's a relatively simple deal, a good commercial real estate agent will be a sufficient resource," says Ryan Pearce, a commercial sales and leasing agent with NAI Latter & Blum in New Orleans. But, if the dollar amount of your lease is in the hundreds of thousands with a big build-out, Pearce suggests, in addition to a good broker, consult an experienced real estate attorney.
Once you have the right team in place and an understanding of the differences between lease terms and types of space available, it's time to prepare to negotiate.
Start negotiating a lease space by following these five tips
1. Become familiar with the commercial real estate market.
Knowing the price and terms of recent leases for similar spaces will give you an idea of what you may be able to negotiate. A commercial real estate exchange in your state and sites like Loopnet are good resources for compiling listings you can compare for research purposes. Your commercial real estate agent can also assist with determining what the prevailing rents and rental terms are for the type of space you're seeking. Finding out what terms the tenants in your potential building are getting from the landlord can help you, too.
2. Establish options for rent increases and renewals ahead of time.
"One of the most common mistakes businesses make is not factoring in options for renewal and not defining how rent will be escalated," says Pearce. "If you have no option language in your lease, you are probably at the mercy of the landlord."
The ideal lease length depends on the type of business you have. Retail businesses are more location-dependent and may want a longer lease term. On the other hand, businesses leasing office space may want a shorter lease so they can move locations to get a better price if the market changes. If your company is going through lots of change, consider a shorter lease until your business adapts to the changes, in the event you need to quickly scale up or down. Try to get the most favorable lease length for your type of business. Annual rent increases are usually a given, but there's room for negotiation when it comes to how the increase is calculated and whether there's a cap on the increase.
3. Align core factor charges with space utilization.
Unless you have a gross lease in which all costs are included, you may be paying for a percentage of the building's common areas in addition to your rental square footage. This percentage is known as your core factor. It's typically anywhere from 8 percent to 25 percent, depending on the type of shared space and your usage, and can be open to negotiation. Make sure you're being charged according to how you would actually use the space.
4. Unveil hidden lease expenses: from utilities to parking and beyond.
Once you know your appropriate core factor, it's time to examine the other costs included on your lease such as utilities, insurance and maintenance. "Have everything specified as much as possible when it comes to tenant and landlord responsibilities regarding maintenance, operating expenses, default remedies, insurance coverage levels and waivers of subrogation, Americans with Disabilities Act (ADA) compliance," says Pearce. "And also the rights of entry, rights of first refusal, options to renew."
If you're responsible for maintenance, find out the condition of the building's equipment and systems so you can negotiate the dollar amount accordingly -- or even get the landlord to take more responsibility in exchange for slightly higher rent. Are there separate utility meters or are utilities divided among tenants by square footage? If your business does not use as much power as your neighbor, you should negotiate this upfront. If janitorial maintenance is included and the landlord chooses the service provider, negotiate a cap on costs that's in line with the marketplace for those services. If the landlord controls the cost, that cost should be defined and capped whenever possible.
But don't assume all net leases include the same costs. Not all costs are obvious, and you can't negotiate what you don't know.
"Parking may be an expense that is overlooked depending on the location," says Pearce. "Sometimes signage on a pylon can be extra. If there is a digital sign, sometimes they can charge for extra exposure. If there is a change in use, then there might be additional costs associated with getting a governing authority's approval, even if zoning allows it."
5. Maximize the lease renewal to cover improvement allowances
Will you be adding energy-efficient windows that would benefit you and the landlord? Do you want to put in higher-end flooring? It's not typical, but you may be able to negotiate some funds to spruce up your space upon renewal or get some rent abatement instead. "The less established tenant is rarely going to get much of an actual financial contribution from the landlord," says Pearce. "So what is sometimes negotiated is free rent in addition to a stair-stepped rent for a period before it normalizes."
Prepare for this conversation by having bids from several reputable contractors that include project specifics.
"The more established the tenant and the better capitalized the landlord, the more likely the tenant is to get a build-out allowance or a site built-to-suit where costs are amortized over the course of the lease," he says.
The market is getting more nuanced and more technologically savvy. Use all the available data to make sure you know as much as the landlord does.
"Get a good brokerage team to represent you," says Pearce. "A good brokerage team knows how to interpret that data better than the non-broker. With a good team, you get multiple perspectives."
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