I always chuckle when a tenant says something like "I'm friends with my landlord" and assumes they're going to be taken care of and get the best deal. Below are some of the top tricks we've learned over twenty-five years of negotiating leases that your landlord doesn't want you to know:
1) Don’t Cut Out The Middleman
Dealing directly with the landlord doesn’t necessarily guarantee the best deal... When you plan a vacation, do you contact United, Hyatt or Hertz directly? Of course not, you rely on Expedia or Kayak to get the best package and you recognize that the fees are built into the deal. Well, commercial real estate works in a similar fashion. Yes, the landlord may offer a tenant an attractive-looking rental rate but this is often just window dressing that hides all of the landlord’s profit centers that are in the lease. A savvy tenant will hire its own advisor to represent its interests... Why not? The landlord is paying for it!
2) There Is A Free Lunch (Or At Least Dessert)
When you order the prix fixe lunch, do you skip the dessert? No, you recognize that all three courses are included in the meal. Similarly, the rent you pay in a commercial lease includes three components: 1) the rent, 2) a commission for the landlord’s agent and 3) a commission for the tenant’s agent. Thus, a tenant advisor is the equivalent of the free dessert! You’re not going to get a better deal without a tenant advisor, conversely, the landlord will profit more from the tenant’s lack of expertise.
3) Don’t Hire Your Ex-Spouse’s Divorce Attorney
You wouldn’t hire the same divorce attorney as your ex-spouse, but many tenants unknowingly hire brokers who also represent landlords... These agents can’t (and won’t) promote lease terms that will threaten their long-term relationships with building owners. So-called tenant brokers at larger firms can be told by management not to negotiate hard on behalf of their tenant clients when the landlord is also a client of the firm. A tenant is much better off finding a trusted and unconflicted advisor.
4) Time Is Not On Your Side
Leasing office space is NOT like finding an apartment. Commercial office leasing is a completely different process with much more red tape, bureaucracy (and risk) than apartment hunting.. There are few last minute deals to be had.. Instead, when a tenant lacks sufficient time to plan a relocation, the leverage quickly shifts to the side of the landlord. Therefore, we recommend starting the search at a minimum of 3-6 months prior to your planned occupancy.
5) Leases May Expire, But Shampoo Doesn’t
You wouldn’t panic when your bottle of shampoo reaches its expiration date and run out to Duane Reade to buy more shampoo. Everyone knows that this is just a marketing ploy. Similarly, a lease expiration is often a ploy used by landlords to cause a tenant to sign a long-term commitment. Although you never want to “holdover” without a lease, what is not always obvious is that it’s very easy to obtain a short-term renewal and buy the necessary time to make the right long-term decision.
6) Sign the Shortest Lease Term Possible
Why do you think a landlord always demolishes existing installations and delivers space in a raw condition? So they can force the tenant to build out the space and accept a longer-term lease commitment to amortize those costs! Landlords have gamed the system so that a long-term lease primarily benefits landlords, brokers and construction companies. It often can be just as easy to find an existing installation that can be modified for occupancy and to sign a shorter-term commitment.
7) Don’t Pay Retail
Ever see those department store ads for 50%-70% off and wonder who the heck was paying tho original prices? Well, leasing office space can be the same. Advertised rents for commercial property are merely asking rents and hence, extremely negotiable. The way to get the best deal is to create leverage by negotiating with competing properties and being prepared to walk away from either. Similar to venture capital where the best way to fundraise is to not need the money, if office space is commoditized the pricing drops.
8) Face Your Fears... of Relocating
Many tenants have an inaccurate fear of the cost and disruption to relocating one’s business. Today, with cloud computing, internet phone systems, email and a mobile workforce, the actual costs of relocation have decreased dramatically. Landlords will spend more to find a replacement tenant (in commissions, construction, free rent) than to renew an existing tenant, so leveraging a perceived threat to vacate can help a tenant maximize similar concessions when negotiating a renewal from its current landlord.
9) There’s No Such Thing As Free Rent...
Free rent usually begins upon execution of the lease document, thus, time spent on tenant improvements and construction eat into that free rent period. Once the free rent period begins, a landlord loses any incentive to respond quickly to tenant requests for base building work, permits and construction approvals. A savvy tenant will request a rent abatement during construction in addition to free rent. Also, many landlords will build to suit, which allows the tenant to push back the free rent period until after the completion of the landlord’s work.
10) Cash is Not Always King
Tenant improvement allowances are often referred to as “cash allowances”, when in fact they are partial reimbursements against construction costs accrued during tenant improvements. Accordingly, the tenant needs to build its own space using its own capital, complete the project and free the space of any construction liens and submit receipts for reimbursement to the landlord, before any reimbursement takes place. Additionally, the reimbursement process usually occurs over time, with a small percentage withheld until the final payment is made. During the entire time of the reimbursement period the landlord has retained the cash allowance at zero interest.
11) Renewal Clauses Are Worthless, With One Exception
A typical renewal clause should be requested but not excessively negotiated. The typical renewal language will offer a renewal at a fair market rent (“FMR”), however, that FMR will rarely be lower than the existing rent in the lease. The balance of the clause will identify the process and mechanism by which the landlord and tenant mutually determine a FMR and what happens if the two parties disagree. The one exception is that if the tenant is successful in agreeing upon a fair market rent and renewing the existing lease, the landlord loses the opportunity to remeasure the space and increase the square footage (which routinely happens).
12) With Leases, Everything Is Negotiable
The commercial lease is typically a 50+ page document which will require substantial review, commentary and redrafting prior to lease execution. This can take 3-6 weeks. The marginal economic improvement gained in getting the last dollar off the negotiating table during negotiation of lease terms is often offset by time lost during lease negotiations and construction. We recommend getting to leases relatively quickly for the following reasons: 1) it removes the space from the market, 2) many significant terms will only be negotiated by the landlord during lease negotiations and 3) it forces the landlord to address the tenant’s credit and its impact on lease securitization. If credit concerns are going to be a deal breaker, it is helpful to know that as quickly as possible, consequently the savvy tenant will submit financial statements with the initial lease proposal to sidestep this constraint.
13) If You Want to Be a “Good Guy”, Buy a Dog
New York City landords today are very fond of limited personal guarantees in addition to security deposits to securitize leases. While these guarantees are truly personal guarantees, they’ve been given the innocuous misnomer of “good guy guarantees”. Many tenants confuse these with termination clauses because conceptually, the personal guarantee dissolves upon vacancy. However, the entity on the lease is still responsible for the lease obligation and the security deposit remains at risk. You can still be a “good guy” without signing one of these.
14) Subleases Always Require Landlord Approval
Sublease space offers many benefits to a commercial office tenant: shorter lease terms, discounted rents, move-in condition office space and potentially lower security deposits, to name a few. But what tenants often don’t realize is that once a sublease if fully executed, physical occupancy can be delayed by up to thirty (30) days during landlord approval. [Why thirty days? The document typically doesn’t take longer than a week to review and landlords tend to wait until the last minute to deliver its approval, but if they are allowed thirty days, they collect an extra month of rent from the existing tenant.]