Tips for Negotiating a Commercial Real Estate Lease

Here are tips on how to negotiate a successful commercial real estate lease. It is a great asset to have a Tenant Rep broker on your side to help you understand your lease.

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Start the project well in advance. Not leaving enough time to effectively negotiate is the single biggest mistake most companies make. A nine to twelve-month lead time is recommended for the site selection, and commercial real estate lease renewal process. Anything less than this amount of time will give the Landlord a negotiating advantage when it comes time to renew your lease.

Assemble a good team of professionals early in the process to maximize the success of the project. The project team should be comprised of a qualified real estate expert, attorney and tax accountant. Depending on the scope of the project the team may also include an architect, project manager, construction contractor, furniture vendor, IT vendor, and move coordinator.

Select a real estate expert who understands both your space needs and your long-term company objectives. Choosing a real estate broker who fully understands your company’s existing unique space needs as well
as one who identifies with your potential expansion needs will prevent occupying the wrong space for your business.

The project team should put together a plan outlining the desired objectives of the overall project. The plan should start with the short term and long term needs of the business and layout a strategy for successfully negotiating commercial real estate lease terms that are in line with the needs of the business.

Understand true occupancy costs. Be sure to get estimates for any services not included in the rent such as utilities, janitorial and trash removal. Real estate costs are a significant portion of your overall monthly occupancy spend but many properties have unforeseen costs associated with the location. Having a real estate professional who knows where to look for these ‚Äúhidden costs‚ÄĚ is paramount.

Verify the landlord’s operating expense estimate. Often times the landlord’s estimate for operating expenses does not include expected increases in property taxes and insurance. Avoid unexpected year-end operating expense bills to the tenant!

Make a fair financial comparison between all the viable market options that includes all occupancy costs. A cash flow analysis and a net present value analysis comparing effective costs is critical in making an apples-to-apples comparison.

Analyze the landlord’s proposal against existing market conditions as well as future rental rate and operating expense projections. Most companies evaluate Landlord’s proposals to current market conditions only. Reviewing future projections is important in determining the right lease term.

Before executing a lease, have a real estate attorney review the lease agreement. Have a tax accountant review the lease terms to ensure build-out costs are being handled in the most tax efficient manner.

Downloadable PDF Here

April 8, 2020

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