How to Negotiate a Commercial Lease
Are you in business or want to go into business? Need a space to sell your product or meet potential clients? Then you will need to know how to negotiate a commercial lease. Commercial leases are different than residential leases as the parties to the lease have different interests, needs and expectations.
Here's how to negotiate a commercial lease.
Understand the Bigger Picture
To effectively negotiate a commercial lease you need to know and understand the bigger picture of how the lease terms impact the business. A lease is a large, fixed, monthly expense that will impact the bottom line. That means it can add or detract from your income. Before you should negotiate a commercial lease you should have a profit and loss statement for at least the anticipated first year's business. More typically you will want to have several prepared based on the best case, worst case and most likely performance. With this you can see how your occupancy costs impact your profit margins. Do not fall into the trap of basing what you can afford on the performance three year's out. This projecting future potential is a method designed to justify bad business decisions. Things can and do happen and you must be able to weather prolonged weak performance.
Improve Your Communication Skills
Filters are the impediments to clear understanding of the spoken word. Every individual has his or her own filters that change what someone else says. When dealing with a company or corporation which may own a commercial property each person within that organization has their own set of filters. The owner of the commercial property is likely not the person you are dealing with when negotiating a commercial lease. Assuming that you are dealing with the landlord's broker or property manager or leasing agent your verbal proposal will never get to the actual owner or decision maker without a change in the message. The best way to avoid misunderstanding or intentional misdirection is to always put your proposals in writing. And require a response to include the original offer as an attachment. This is your best chance of making sure the decision maker has had the opportunity to hear your message first hand.
Establish the Value You Have to Offer
When negotiating a commercial lease the monetary aspect of the the transaction are far less important than in a residential negotiation. Too often prospective tenants approach landlords focused on the rent when the landlord is more interested in the financial stability of the tenant and the tenant's contribution too the shopping center. Landlords will willingly extract as much money as possible if the tenant is not knowledgable enough to know the other attributes he or she may have to offer. To properly negotiate a commercial lease the tenant must appreciate the available commodities that enhance the tenant's occupancy to the landlord. These possible commoditis may include a unique or complimentary use, a strong balance sheet, a large personal guarantee, the prospect of multiple transactions with the tenant, a strong advertising campaign that will bring more traffic to the shopping center, and the potential of increasing the rent value of the adjacent spaces. This value oriented approach, also considered the whole pie negotiating strategy, may help keep the rent below market even though others are offering more.
Develop Your Power Base When Negotiating a Commercial Lease
Landlords like to think they have the best site in the area. Prospective tenants can balance the power in the negotiation by:
- Demonstrating knowledge of the city and its approval process by sharing prior experiences with the city and noting the professionals available to expedite the permitting process.
- Revealing the investment the tenant will be making in the premises and how the improvements may benefit the landlord.
- Discussing alternate locations you are considering and demonstrating you have choices when it comes down to picking a site.
- Selling yourself as the right person with whom the other person should be negotiating. Indicate that it is you, not a cororate flunbky, who will do everything possible to gain city approval and follow through on the buildout of the premises.
The most important commodity you bring to the table is you. Assure the landlord that you consider success in the location as important to your reputation and that you are committed to making the business a success whatever it takes. Your conviction, passion and vision will translate as a compelling argument to give your proposal more merit with the landlord.