How to Negotiate a Commercial Lease

two people negotiating contract on computer

A property is often one of the most important assets your company can possess. It functions as a practical base of operations and a professional space to meet clients, partners, and potential investors.

This doesn’t necessarily mean that you have to own the property, though. Leasing units can be just as effective, whether yours is a new business or you’re expanding your operations into new locations. Nevertheless, getting the most out of this approach requires you to not simply accept the terms of the first option that comes your way. You must make efforts to negotiate a commercial lease.

This doesn’t come naturally to every entrepreneur. So, what should you know about negotiating a commercial lease? Let’s dive a little deeper into the process.

Perform Some Market Research

To negotiate a commercial lease effectively, you need to come from a position of strength. If you don’t have a solid understanding of the situation you’re entering, you’re always going to be on the back foot. As such, it’s important to put in some time for research before you negotiate a commercial lease.

Specifically, you need to review the local commercial real estate market. On the most basic level this gives you insights into what the range of commercial rental prices are in the area. This is particularly vital if you’re moving your business from another city, state, or county. The standard rates of your previous location may not be the same as the one you’re targeting. 

One of your best tools here is a comparative market analysis. A big help can be the NAR market research tool here. You want to find things like price ranges based on size, location, and amenities. You may be able to conduct the research yourself. However, if you’re working with a broker to find your property, this should be a resource they can obtain for you.

The information you have here can help you to negotiate prices with the landlord in a more informed way. If landlords are demanding rates much over the market average, the data can give you a basis on which to query the reasons for this and negotiate lower rates.

Clarify Your Needs and Limits

When you’re negotiating a commercial lease, you also need to have a confident understanding about your business. Specifically, you have to be clear on what your company needs from the property and what you’re willing to invest in your rent. If you’re uncertain of your needs or limits in any way, this can lead to you accepting terms that don’t suit your purposes or can leave you financially disadvantaged. This may seem an obvious step, but inexperienced entrepreneurs may make the mistake of guesstimating or failing to consider their long-term requirements.

Go into detail here. Reviewing your business plan is always a smart approach to take before you’re negotiating a commercial lease. After all, this is a document that should outline the specifics of your mode of operations, the resources you need, and your plans for the months and potentially years ahead. You’ll also likely have both data on your current finances and your forecasts moving forward. With this information you can create a profile of the property elements you need to have in place for your business to have the best chance of success.

Utilize this document in discussions with your commercial landlord. Talk about what doesn’t meet your requirements and what would support your growth. One of the mistakes new commercial tenants make is thinking that what’s advertised is all that’s available to them. Factors like this could be as significant as the square footage available, or as small as specific clauses in the lease agreement itself. Remember that you’re a valuable commodity to a landlord. If helping you meet some of your core needs can keep you in the property longer, they may be willing to be flexible.

You should also gain clarity on your financial limits based on your business plans and forecasts. The clearer you can be on what you’re not just able but willing to spend on a property, the more confident you can be in your negotiations. Don’t be afraid to stand relatively firm on your limits here. Being influenced by a landlord or agent to spend more than practical can only harm your business.

Review the Property Thoroughly

man walking into a class a commercial building to do market research

You can’t simply start your negotiations with a cursory understanding of the property you’ll be working with. The landlord or agent already knows more about the property than you do, which puts them in a position of strength in negotiations. You need to redress that balance as much as possible.

Make sure the condition of the property is suitable for immediate occupation and functional for your company. Any issues that could delay your moving in or opening dates will certainly affect your productivity and profits. This should include elements such as areas of damage or faulty infrastructure. It may also be a lack of plumbing or data cabling. It’s normal for the property not to have the right fixtures and fittings or paintwork for your company. But anything that makes the unit not immediately suitable for occupation certainly affects its value. You can take this issue  into negotiations.

You should also review the property for its surrounding area. Are there any local elements that could represent a problem for your company? For instance, if there is significant construction occurring for a period of time, this might be disruptive to your business. You may be able to negotiate a discount for the time construction is taking place.

Utilize Points of Leverage

Before you start to negotiate a commercial lease, one of your most important actions should be to understand where you can gain leverage. Certainly you don’t want to push discussions to the point of animosity with the potential landlord or even take an unfair advantage. However, by recognizing what makes you attractive to a landlord, you can drop these aspects into the negotiations to contextualize your requests for better rates and conditions.

These might include:

– Popularity of your business

If your business has already been operating for some time, you may be moving to better cope with the demand for your services. This popularity can be an attractive prospect for landlords. On the most basic level, it can give them confidence that you’ll continue to have a steady revenue stream to pay the rent with. But your popularity can also have an impact on other businesses, which can be particularly appealing to landlords leasing units in malls and retail parks. Not only can your traffic affect the success of their other tenants it can also make those units more attractive to new tenants.

– Potential for growth

If your company is seeing reliable and increasing demand, you may be planning expansion to cope with this growth. This might include the necessity to take on more units within the landlord’s business park, mall, or office building in the near future. You might also be considering opening in new locations in which the landlord owns properties. The landlord can certainly substantially benefit from building a positive relationship with you in these circumstances.

– Commitment to a longer lease

In most cases, a commercial landlord will prefer longer leases. It gets expensive to keep finding new tenants, not to mention the costs involved with getting a newly vacated property into a condition that it’s suitable for fresh tenants. If you have the capital and income stream to commit to a long-term lease, the landlord may be more willing to agree to a lower rental rate to keep you attached to the property for years or even decades.

– Poor market conditions

It’s no secret that commercial real estate has been in a steady state of turmoil since COVID, shutdowns, and subsequent empty office buildings have stacked up. This is something that you can use for leverage as well. Most of the time a landlord or asset manager would much rather have rent from a new tenant than an empty office building, even if it means shaving a little off the top.

Wrapping Up

Not all entrepreneurs know how to negotiate a commercial lease. It’s important to remember that in many cases, landlords have as much incentive to attract you to their property as you have to prove yourself a worthy tenant. Nevertheless, you can put yourself into a stronger negotiating position with good preparation. 

This should include: 

  • Market research to gain a better knowledge of acceptable rental rates
  • Clarity on what you need from the property and the capital you’re willing to invest
  • A thorough property assessment to identify issues that should form part of negotiations
  • A good understanding on what leverage you can use to influence negotiations in your favor

These preparations can take a little extra time and energy. But you’ll find that your confidence, knowledge, and clarity empower you to approach negotiations in a way that helps you gain a fairer and more competitive lease.

Stephen Hachey

Mr. Hachey opened his real estate law practice in Tampa, Florida in 2007. He is admitted to the Florida Bar and is also a graduate of Florida State University, earning his law degree in 2005. He is also a current member of the National and Florida Board of Realtors, the Florida Bar (Bar number 15322), and a Circuit Civil Mediator in the state of Florida.

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