10 tips for negotiating a commercial real estate lease
Depending on the nature of your programming, most nonprofits need a space to rent at one point or another. Or maybe your organization has a space and needs to sublease. Or maybe you are considering renting space from another organization. In any case, most organizations that grow past a certain size need some kind of commercial real estate lease. I can help with these things, but to get you started down the path, here are some tips when considering commercial leasing…
Negotiating a commercial lease
1.Do your homework.
Know the average cost of the type of commercial space you’re seeking—retail, office or industrial. A commercial real estate broker can show you historical data for the region, and you can research prices on websites such as CIMLS.com, CityFeet.com or LoopNet.com.
2. Determine your needs.
Consider space, utilities, infrastructure, parking, storage, accessibility to major highways and more. Create a checklist of your needs and wants, specifying which are “nice to have” and which are essential.
3. Get professional help.
Real estate brokers work for landlords and receive commission on the lease’s value, so while they can offer a lot of useful information, it’s also important to consult a lawyer. An attorney experienced in commercial real estate can explain terms, advise you and help you negotiate.
4. Ask what the total cost covers.
Cost per square foot is just the beginning. There may also be Common Area Maintenance (CAM) costs, property taxes, insurance, trash collection, repairs and utilities. Depending on lease terms, you may be expected to pay some or all of these costs directly, pay them to the landlord, or have them built into your rent.
5. Know what is permitted.
Make sure you understand what uses the property is permitted for and that there are no zoning regulations or laws that could adversely affect your business.
6. Discuss improvements.
If you need to remodel the property to suit your business (known as a “build-out”), be sure you understand what improvements can be made, who will pay for them, who will oversee the work and whether you’re expected to restore the space to its original state if you move.
7. Ask about subleasing.
Getting the rights to sublease part or all of your space to another tenant protects you from breaking the lease if you must move unexpectedly. It also helps you cover costs if you’re leasing more space than you currently need in anticipation of growth.
8. Consider timing.
You can generally negotiate better terms by signing a longer lease, but what if your business grows faster than expected and you need to move before the lease is up? A short lease with options to renew and a cap on future rent increases may offer the greatest flexibility.
9. Put it in writing.
Before viewing properties, make a list of questions to ask the broker and landlord. Never negotiate based on a verbal offer. Get terms in writing and have your attorney review them. Commercial landlords generally expect you to make a written counter-offer, too.
10. Ask for what you want.
In today’s economy, tenants still hold the bargaining power—so now is the time to ask for the extras you want. Who knows? You just might get them.
And…a few more tips
Here are 10 more tips on how a tenant should negotiate a commercial lease. With special considerations for strip mall space that has an “anchor” tenant.
1. Don’t blindly subordinate your lease to the anchor lease.
Mall developers are so desperate to get big-box or anchor tenants they give the anchor an agreement giving the anchor virtual control of the mall and the ability to veto any tenant or activity that displeases them. This agreement is binding on future tenants as an easement unless you get a waiver. If the anchor won’t agree in writing that they will honor your quiet enjoyment under your proposed lease with the mall, move on.
2. Insist that your landlord disclose any side agreements that may impact you.
Often landlords will make side deals with tenants restricting what other tenants will sell. These side deals usually do not bind new tenants, unlike the agreement with the anchor described above. However, you could get pulled into a lawsuit. You don’t want to get into a situation where you have to deal with extensive interrogation and expensive discovery to prove that you did or didn’t do something to compete with another group.
3. Anticipate the brother-in-law vendor.
You will be charged your proportionate share of certain common costs. Protect yourself, and make sure all such pass-throughs are bid out competitively and at arm’s-length. Cap the pass-throughs.
4. Do not waive your right to be treated in good faith and reasonably.
Never sign any contract that has a provision that allows the other side to exercise its discretion so broadly that it does not have to do so consistent with “good faith, reasonableness or timeliness.” Such provisions may not be enforceable as against public policy. Some lawyers advise clients not to worry about it because no judge will enforce it. But the reality is, some judges will enforce it while other judges won’t viewing it as unethical for a lawyer to advise a client to sign an agreement that includes an unenforceable clause.
5. Do not waive your right to a jury.
Unless you are a powerful tenant, this one is an uphill battle but well worth the effort. Even with the decline in landlords’ strength, the average lease is one-sided in favor of the landlord. As imperfect as juries are, they know a bully when they see one. Your final protection in a dispute may be that the landlord doesn’t want to take his chances in front of a jury.
6. The lease may as well be written on an envelope if the landlord has no exposure.
Landlord lawyers sneak into their leases a devious little clause that says if the landlord loses a lawsuit its damages will be limited to its equity in the mall. Translated, that means if the mall is fully mortgaged, the landlord is judgment proof. Zero equity means the landlord pays no damages.
7. A renewal option is worthless without a fixed rent.
If you negotiate an option to renew the lease, make sure you negotiate what the rent will be. Avoid clauses that say you will negotiate the future rent later or that some appraisal process will set the new rent.
8. Have your banker look at the lease before you sign it.
Many bankers will lend to a franchisee or business only if the lender has the right to find a new operator if you default on your loan. In order to do this, your lease must require the landlord to allow you to assign the lease if you default on the loan.
9. Some arguments deserve to be ignored.
Some examples: “Don’t worry, we would never enforce that clause.” “All the other tenants have signed it.” “We could never make the change you are asking.” “Do you want to do the deal or not?” “It’s just boilerplate.”
10. Understand the lease before signing it.
Your lawyer does not appreciate calls from clients asking her to look at a contract that you’ve “just signed.”