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Friday, July 20, 2012

Commercial Real Estate Lease Negotiation Tips

One of the greatest values a tenant representation broker can provide to his client is advice during the lease negotiation with a landlord.  A professional landlord negotiates leases every day, with the help of a leasing broker and an attorney.  The tenant, who rarely participates in the market, should even the playing field by enlisting the services of his own advisers.  Remember, hiring a tenant representative broker doesn't cost you money, but it can save you money.


Below are best practice guidelines for commercial real estate lease negotiations.  Please consider these tactics early in your space search process.  


1. Develop Realistic Alternatives to Create a Competitive Environment
Many tenants do not develop legitimate alternatives to their first choice. If a landlord believes you’re not willing to switch to a different property, you lose your negotiating leverage.  Tenants often make this mistake in a lease renewal scenario; their landlord does not believe they are ready, willing, and able to walk away. The key to a successful negotiation is creating competition between your current landlord and other landlords in the area.


2. Start the Process Early
Landlords know that the managers of other buildings can take six to eight months to create a space plan, get construction pricing, agree on a rental rate, prepare a lease document and ready the space for occupancy.  If a tenant waits too long before asking for a renewal proposal, he signals to the landlord that he's not developing realistic alternatives, reducing his leverage in the negotiation.  Landlords will drag out the process of a renewal in an attempt to limit the tenant's alternatives and reduce the tenant's negotiating leverage.


3. Knowledge is Power 
A quality tenant representation broker can provide valuable knowledge to inform your position in a negotiation. Your broker should be able to answer the following questions:
Is the office building being sold? 
Is the largest tenant moving out? 
How much free rent did the last tenant get? 
Does the building have HVAC or parking problems? 
What is the landlord’s financial situation? 


Your tenant representation broker should also analyze the market to provide a true “apples to apples” comparison of different facility choices.  Lease terms such as full service gross, modified gross, triple net, tenant improvement allowances, rental abatement, escalations, base years, operating expense stops and loss and load factors can obscure the true amount you’re paying and make legitimate comparisons difficult.  A good tenant representative will sort through all this for you.

Troy Golden is Vice President at SCGroup Real Estate. He received his undergraduate degree from Yale University and his MBA in Real Estate from the Wisconsin School of Business. Troy specializes in commercial office brokerage in Chicagoland. Please contact him at tgolden@scgroupco.com or (630) 474-9997.  Visit SCGroup Real Estate at www.scgroupco.com

6 comments:

  1. Commercial leases are entirely different and difficult process to understand if you are going through first time. it was nice reading about the process..did get good information from here. thanks for sharing and keep posting such post.
    Newbuy

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  2. Hi,
    Many time I heard about commercial leases but did not know what it is exactly. After reading your blog most of the definitions are clear now. Thanks such informational post.

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  3. I agree with your point that tenant representative broker will save our money by properly guiding us in the process of real estate business.
    Thanks,
    Rachel

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  4. "Remember, hiring a tenant representative broker doesn't cost you money, but it can save you money." This is excellent advice. Thank you for the breakdown. I'm going to use it going into the future.

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  5. I like your point about having alternative options (or at least appearing to) so your landlord feels like they need you, because finding new tenants costs them time and money. The problem with highly desired areas is that tenants are easily replaced, so it makes it harder for them to stop their landlord from increasing rent.

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Hello,
Thanks for the comment. Your comment will appear soon, after I verify that it is not spam. You can contact me directly at tgolden@scgroupco.com, or 630.474.9997. Thanks,
Troy