Everything You Need to Know About Being a Savvy Commercial Tenant
Written by Landmark Advisory Services
For those looking for a place to run your business, entering into a commercial real estate negotiation might seem as straightforward as renting your first apartment. Many of the moving parts feel the same: there’s a lease, you pay rent, you have a landlord, and it’s all very straightforward. But in fact, a commercial real estate negotiation is an entirely different and, in most cases, unfamiliar scenario. Anyone going into a commercial rental without the proper information could do major damage to their business’s prospects and wind up with a contract that causes major problems down the line. Any mistake made at the onset stays with you for the duration of the lease, which can be up to five, ten, or more years.
What’s important to understand is the power-imbalance in the market. On the surface, landlords ought to be just as invested in retaining you as a tenant as you are in retaining your space. But the fact is, most landlords view tenants as reliable sources of income rather than customers with the option of going elsewhere. Moving a business is difficult, and so most landlords feel like their tenants are fairly locked into their locations once they sign on. It’s important to understand the rationale of your landlord so you can advocate for yourself effectively when considering where you want to set up your business, but actually using that information is even more complicated.
To help people understand what goes on behind commercial real estate contracts, we’ve put together the following thoughts so tenants have the information they need, at their fingertips, to make an informed decision about where to invest in a business space and whether or not to renew their lease.
Why Landlords Focus on Tenant Attraction Rather Than Retention
Tenants are never in a better position to negotiate than when they are about to move into their new space. The moment they agree to operate from somewhere, the landlord sees them as a likely source of consistent income. While most tenants believe that if they pay their rent, don’t cause problems, and take care of their space the landlord will be invested in keeping them, the fact is that landlords know that most people aren’t going to move their business without cause. Tenant retention is typically a foregone conclusion in your landlord’s mind and they may have already considered their current tenants as a high renewal probability on their financial documents. The threat of relocation at the end of your term is another important bargaining chip but only applies if certain criteria are met.
Do you still have ample time to relocate before the end of the term specified in your lease? Have you exercised your option to renew? Time is leverage in the negotiation process, and if you’re running out of it then the landlord knows that you probably won’t be able to find a new place in time and your continued tenancy is a forgone conclusion.
Healthy competition is beneficial to tenants looking for the best deal for their space. Landlords rely on a tenant’s ignorance during negotiations. They offer common discounts while keeping certain aspects of the property out of the conversation. Lease protections, facility improvements, and other points about the property are glossed over. Landlords know that most tenants don’t have time or patience to negotiate, and they use that aspect of the tenant’s motivations to secure a deal that benefits them while leaving few concessions for the client.
The best possible negotiating situation the tenant can come in with is to be able to walk away from the table. This means having tenant representation but also being able to demonstrate that you can walk away from the offer if you don’t like what the landlord has to say. Understanding where the market currently stands, what price is fair, and how the property stacks up compared to others is a good start. It’s also not a bad idea to have a reasonable alternative to your space that you can use as leverage with your current landlord. Being able to draw a concrete example of another offer that you have on the table gives your landlord clear benchmarks to match, and in turn, allows you to push for a fair deal.
The main point to remember when renewing a lease is that it presents an opportunity for tenants, rather than a hassle. Lease expiration means an opening for further negotiation that can result in a win-win scenario for landlord and tenant if both parties come prepared.
Look Beyond Rate
In spite of the fact that most lease documents are long, drawn-out contracts, landlords tend to focus tenants on rate and rate alone. This leaves quite a bit of other content left unexamined, and the remaining parts of the contract can easily affect how much your space will actually cost. The landlord would never look at the base rental rate alone when calculating their potential return on investment, so you should not do so when calculating your costs! Other factors to consider include completion of work on the space, tenant allowances, periods of free rent, and the breakdown of additional occupancy costs. Tenants trying to get a good deal need to go beyond the baseline cost to understand what kind of deal they’re actually going to be living with once they sign on the dotted line.
The way that landlords typically present rates is transactional. It’s similar to the sticker price on a car- it’s presented as how much you need to pay in order to purchase the car, but there is room to negotiate. The same concept doesn’t seem like it would apply to rent, but in fact, it should.
Instead of taking the price that a landlord quotes at face value, the rate should be viewed as the initial number and entered into like a business negotiation. If tenants look into how the rental rate is determined and inquire about hidden costs, the landlord might be more willing to enter into a conversation about the cost. In order to intelligently challenge a lease, tenants should have the lease, facility, and operating expenses professionally analyzed to see what the rate is based on. In addition, understanding the landlord’s financial investment into the property will help tenants gauge how likely the landlord is to negotiate.
Treating real estate negotiations as a business negotiation means bringing in a party that will negotiate ruthlessly on your behalf. This is one of the major benefits of having a group like Landmark protect your interests. Our understanding of the costs being presented combined with our market expertise means we can be tough negotiators without risking the relationship between the tenant and the landlord.
Do the Math During Your Lease Negotiation
Rate comparison and straightforward calculations of dollars per square foot are a good place to start, but for true negotiations, proving your point means proving your math. Rather than comparing two different leases for similar spaces, which gives room for the “apples vs. oranges” defense, tenants need to go through the correct process to show that they know what they’re talking about and they have the numbers to back it up. This process is complicated, which is why you need a professional. Landmark can represent your interests in a negotiation as an expert in real estate, which gives you a much stronger setup for the negotiation of terms.
In most cases where tenants try to examine a different lease to back up their negotiations, it’s easy to get tunnel vision for rent and square footage. But there are actually many more factors that have to be considered when understanding the rate. Design, amortization of construction costs, offered tenant allowances, and other property upgrade factors can easily affect the rates involved in different spaces.
Tenants also tend to focus on the cost implications included within the lease but forget about the lease protections that protect for unexpected facility costs and liabilities. That’s why it’s so important to entrust this process to a professional.
Professional evaluations of leases and facilities clearly show that tenants are taking the negotiation process seriously, and landlords are much more likely to enter the negotiation process with an open mind and a willingness to consider compromise.
Choosing a location for your business is a major undertaking that can have widespread consequences if you don’t take the time to consider all of your options. That’s why trusting a professional to look at the real estate you’re considering for your business is really just, well, good business! Just as you don’t trust your day-to-day operations to amateurs, a professional evaluation can ensure that you don’t just find the perfect location for your business. You’ll also get the best possible value out of the space and have the peace of mind that you aren’t wasting money on a real estate investment that you are contractually locked into.
That’s why Landmark is committed to being a trusted partner of commercial tenants. As a 100% tenant representation firm, we proactively protect our commercial tenants’ real estate interests by doing the legwork and offering our expertise so they can feel confident that they walk out of every real estate deal with the best possible deal. With our commercial real estate experience and insights, our clients know that they are getting the highest value from their corporate real estate portfolios that will ultimately support their company’s long-term business goals.
Let our experts do the heavy lifting! With our help, you’ll walk into every negotiation knowing that you’re getting the best possible deal, and you’ll never have to worry about being stuck in a contract that negatively impacts your business again. Instead, your business will be set up for success for years to come.
Landmark Advisory Services is a commercial real estate consulting firm, specializing in the representation of Corporate Tenants and Occupiers. As an external real estate department, Landmark has acted as an extension of its clients’ businesses for more than 30 years. Landmark can be contacted at firstname.lastname@example.org.