Commercial Leases

Top 10 Tips On Negotiating Your Commercial Lease

By Jim Lieberthal

The key to every commercial real estate deal is the negotiation before it. Many moving parts are essential to the final deal. If a tenant or landlord overlooks any one of them, it may be the difference of hundreds or even thousands of dollars over the course of a lease. Even though other important negotiation points can go into real estate leases, these are my top 10.

First: know the competition and get educated. This can be done by conducting searches on CoStar, the main database for commercial real estate). Driving around and noting the real estate signs in an area also produces valuable information.

Second: Understand the asking prices and what they really mean. For example, one property may offer their space at a base rent plus electric (gross lease), while another property may offer a base rent plus charging back to the tenant a portion of the property taxes, insurance and maintenance on the property (NNN lease) on a monthly basis. The third property may offer an all inclusive price where the base rent includes electric, property taxes, insurance, etc. (full service lease).

Third: Understand the lease. Unlike residential real estate where there is a standard ARMLS lease contract, commercial real estate uses no one particular document. Although some commercial leases use the standard ARMLS lease, most have that form modified to suit each owners needs.

Fourth: Understand the different levels of people with whom you are negotiating. Most negotiations are through brokers who ultimately represent the owners. However, sometimes a broker negotiates directly with the owner of the property. Other times, a broker who represents a property may negotiate directly with the potential tenant. Moreover, there are instances where the broker represents both the tenant and the building owner.

Fifth: Know when to bring the right person into the negotiation. When negotiations look like they are at a standstill, a broker needs to understand when it makes sense to bring key players into the mix such as other brokers, contractors or even owners.

Sixth: Know how to streamline the negotiation. Time kills deals, and a broker must understand how to keep the momentum going. For instance, when attorneys get involved in reviewing the contracts, it is common to see multiple redline copies going back and forth with the brokers being the facilitators. This process could take weeks or longer. I learned early in my career, when a broker is able to get attorneys on the phone together, many issues can get resolved on that phone call.

Seventh: Think outside the box. A good broker needs to have the ability to look at all alternatives when negotiating. There are many ways to skin a cat, and there are many ways to get to the final key points. An effective broker needs to be able to look at different ways to get to the same bottom line.

Eighth: Every owner has points that are important to him or her. Some owners like to give free rent in lieu of tenant improvements. Some would rather have higher face rents and give substantial free rent to bring down the effective rate. Some like to give half rent, while others are okay with lower rental rates. An experienced broker knows how to find out what is important to each owner and tenant. Brokers must use their knowledge to create a win-win for everyone.

Ninth: Every dollar counts. What many tenants may not know is negotiating key points may end up saving the tenant hundreds or even thousands over the term of their lease. For example, at lease expiration, if a tenant needs to stay in the suite longer but does not plan to renew, a holdover clause could take effect. A holdover clause states a tenant who stays after the lease could be charged up to 200 percent to 225 percent of the lease rate. A good broker will make sure this number is more in line. By bringing the number down to 125 percent to 150 percent could mean thousands of savings to the tenant.

10th: Know how to mitigate the “what if” scenarios. For example, an experienced broker will make sure there is a CAP on any major repairs for air conditioning units. Most industrial leases state that the tenant is responsible for repairs and/or replacement. Acceptance of this clause could cost the tenant dearly if a unit breaks or needs to be replaced

 

Jim Lieberthal has invested and worked in real estate since 1997 and commenced his brokerage career with Cutler Commercial in January of 2002. He now specializes in office, industrial leasing and sales in the Scottsdale market. He has completed tens of millions of dollars in sales of commercial buildings and has established a multitude of industrial and office listings consisting of almost 1 million square feet. Contact: 480-529-6400; jlieberthal@cutlercommercial.com.