For Tenants, What You Know Before You Negotiate is Key
June 2003 – By Jack Garson. Print Article
You’re moving your business or renewing your current lease. You want the best deal possible.
Who doesn’t? The question is, how do you get the best deal possible?
The short answer: understand your landlord, know the market, determine your requirements, and bargain accordingly.
First, what does your landlord want?
He wants to see the money.
Nearly every landlord is most concerned with your ability to pay the rent. You need to demonstrate that your business generates sufficient income to pay the rent (the income analysis) and that you have sufficient assets net of your debt available to the landlord if you don’t pay the rent (the net worth analysis).
The landlord may request copies of your operating statement, which shows your income, expenses and net profit, for one or more recent years. To determine your net worth, the landlord may ask for your balance sheet, which shows all of your assets, liabilities and net worth. Businesses that don’t have these financial statements often provide recent tax returns.
Many landlords are also concerned about the compatibility of your business with other tenants and with the image of the property. Some landlords, for example, welcome a restaurant. The restaurant provides an amenity to other nearby tenants, pays a relatively high rent, and may even add prestige to the building. Yet other landlords might view a restaurant as a rodent and roach magnet that generates odors, trash and noisy, drunken patrons.
Likewise, one landlord might favorably view a doctor as a stable tenant who traditionally pays high rent and usually wants to renew the lease to avoid moving patients. Another landlord, however, may consider doctors to be too much trouble because they usually require more plumbing and power, and cause more wear and tear on the building because of all the patients. The bottom line is that a landlord that wants your business is going to give you a better deal, and it pays to know his preferences.
What else matters to your landlord? The list is long, but some issues are more important than others:
- Does your landlord have to spend money to prepare your premises? For many landlords, the less they have to take out of their own pocket, the better deal you will get.
- How long a lease do you want? Generally, the longer the term, the better the deal (although when rents are unusually low, sometimes the reverse applies because the landlord does not want to lock-in a low rent).
- How much vacant space does the landlord have? When a landlord has only one or two vacancies left, the landlord usually wants to maximize the rent and holds out for a better deal. When a landlord has a lot of vacancies, the landlord is concerned about a variety of problems, from getting revenue to paying the mortgage on the building, to avoiding the image that the building is undesirable.
In short, if you understand what your landlord wants, you’re going to get a better deal.
CORE FACTORS TO CONSIDER
But you also need to know the market. Like any negotiation, information is critical. Most importantly, you need to understand what other tenants are paying for comparable premises. That’s where an experienced broker can be invaluable.
Your broker can provide you with a survey of comparable premises, together with the major terms applicable to each premise available. These major terms typically include the rent on a per square foot basis, annual increases in the rent, the amount of square feet, any allowance the landlord is providing for constructing improvements to the premises, and the length of the term of the lease.
This is a good start, but you will probably need more information. For example, office space is typically priced at an amount per rentable or gross square foot (e.g., $30 per rentable square foot). However, the amount of space in your premises that you can see and use is the useable square feet. In contrast, the rentable or gross square feet include your pro rata share of the common areas of the building, such as hallways and lobby. This pro rata share is often called the core factor. The key is not whether you are paying a core factor because you almost always will. Rather, the key is comparing apples to apples.
In some buildings, your core factor will be 10% (this is good) and in other buildings, your core factor will be 20% (not as good). At $30 per square foot, that is a difference of $33.33/useable foot for space with a 10% core factor versus $37.50/useable foot for space with a 20% core factor. Knowing this information, you have the opportunity to negotiate a lower rent from the landlord with the higher core factor or recognize that you are getting the better deal from the landlord with the lower core factor. There’s more:
- Do tenants pay for parking or is it free?
- What expenses does a landlord typically pass through to a tenant?
- Are landlords typically giving free rent at the beginning of a lease?
- How much space do you really need?
- Do you need expensive Class A space?
- Can you save money by leasing a combination of office and warehouse space?
- Can you commit to a long-term lease, or do your growth plans require that you only make short term commitments (or have an option to terminate your lease)?
With all of this information, you will know what your landlord requires, what your alternatives are, and what to ask for. Be sure to include a skillful negotiator on your team. Start early so you can weigh your alternatives. Get everything in writing.
Now you are on your way to getting the best deal from your landlord.