Negotiating a commercial real estate lease can be the most challenging part of buying or selling. Yet, negotiating the terms of the deal is necessary for long-term business success.
Our top 5 tips for negotiating a CRE deal
Additionally, the outcome will define the relationship between the renter and the landlord in the months to come.
Often, successful negotiations occur when both parties cooperate and align expectations. However, the negotiation process takes long, intensive work and can last anywhere from a few days to months. When going into a lease negotiation, it helps to be armed with the knowledge to prepare you for better outcomes – and saving time and money.
Read on to learn some helpful tips to make lease negotiations easier.
1. Get to Know the Buyer or Seller
Knowing who you will be negotiating with will be imperative to closing the sale. That’s why it’s critical to learn as much about the buyer or seller as possible.
The critical information you’ll need to know is how the person operates on top of the sellers’ expectations and motivations for selling. It’s also imperative that you understand the landlord or renter’s track record. That way, you can look at the potential impacts of a long-term relationship.
Once you understand the other side better, this information will help you build an attractive offer.
2. Research the Market’s Standards
One set of data you’ll want to be armed with if you’re contracting a lease is commercial property market standards and leases in your area. Part of negotiating is knowing the costs to get a fair price.
For instance, landlords can make leases more expensive because they’ll price the space by square footage. According to Harvard Business Review, only 75-90% of that space is usable, so you’re paying a higher price for what you’re utilizing. Knowing information like this could give you an advantage in negotiation.
3. Think Beyond the Price
Look to the negotiation as a win-win situation. In a typical settlement, one side aims to get the other side to give up more than they really want to finish the deal. However, successful commercial real estate investors believe that finding a way to help the other side is the best way to win. To negotiate for buying and selling, you have to look past the price and decide which other important factors.
For instance, the competition is fierce for properties with long-term, low-or no-maintenance leases. So a good strategy is to know what to look for in a property and what sells. Then, you can present a firm offer for buying or selling.
4. Look for Any Hidden Costs
If you are the buyer, you could be overlooking the costs of a multi-year lease. The standard for this type of lease would be a rent increase. The typical growth is about 2-3% annually in today’s market. So it’s essential to get the details on these costs upfront.
Find out if your business will be responsible for these increases to get an estimate. Or, say you have a “net” lease where there are other costs, such as maintenance and rent. You can negotiate the dollar amount caps on the prices or offer slightly higher rent in exchange for the landlord taking on the costs.
5. Negotiate for Favorable Clauses
You will encounter various clauses within a commercial lease. You must review each of them with your legal counsel to ensure you’re getting the best deal.
For example, after a lease expires, it can be challenging to find a new lease when a business decides to move to a new space. With that in mind, a holdover rent will occur if you stay longer than the lease allows.
Often, the landlord will include a clause that states the business is responsible for up to 250% of the original payment agreement. This could cost your business even more than what you had in the terms beforehand. Experts recommend bringing that down to 125% to negotiate a new deal.
You never know what the future holds, so the more you can change, the more flexibility you have for your business.
Negotiating at Your Best
However long it takes to lease a commercial property will depend on the negotiation phase and the tenant’s qualifications. So it’s important to keep one thing in mind during negotiations. Emotions can run high, and you can feel like you’re running out of time. It’s best not to let your emotions get the best of you – just remember to remain focused on the task at hand and call upon the skills you’ve gained along the way.
