Negotiating a Commercial Lease in 2023 – How Long Does It Take?
Want to negotiate a commercial lease? Get ready for some careful planning. Often, success in negotiating a commercial lease is going to come down to aligning expectations, the willingness of both parties to cooperate, and whether you have comps, market averages, and other types of data. Negotiations can take anywhere from a few days or as intensive as months of work to settle negotiations for your commercial lease.
Going into a lease negotiation armed with knowledge will help you achieve better outcomes, save time and money, and get some well-earned peace of mind that you’ve signed the right lease type for your business.
Read on to learn the basic steps to take, along with some helpful tips to make lease negotiations easier and score a lower price on your monthly rent.
The Process of Negotiating a Commercial Lease in 2023
Here are the six basic steps to negotiating a commercial lease:
In every stage of this process, you will benefit from the help of a qualified commercial leasing professional.
Step-by-Step Guide for Negotiating a Commercial Lease
Business and lease term negotiations occur in several phases, which were illustrated on the infographic above. Here are some more details on what to expect during each phase of this process.
Step 1: Calculate office space needs and find a property with space for lease
Knowing how much space you need, and finding a property that fits those specifications should be your first priority. It’s relevant for negotiations because, in your search, you will work with a commercial realtor, investigate comps, assess market value and more. You also may calculate usable areas vs. rentable areas if you intend to generate income in that way. All of this is key data to inform your terms for negotiations.
Step 2: Investigate your prospective commercial landlord
Historically, commercial real estate negotiations were conducted on the assumption that the property owner had the upper hand. However, market shifts in tenant favor have also precipitated a shift in negotiations. Take it upon yourself to understand the landlord’s track record, Net Promoter Score (NPS), holdings and other dynamics that may impact a potential long-term relationship.
Step 3: Research market standards
The second set of data you should be armed with is the market standards for the commercial property and the market standards for commercial leases in your area. For example, in the first quarter of 2022 in Houston, office spaces had an average gross asking rate of $29.17 per square foot and there was a 24.8% vacancy rate. Knowing estimates for available inventory, vacancies, and asking prices is helpful for negotiation. This is where having a local leasing expert comes in handy.
Step 4: Review every clause with legal counsel
There are innumerable variations of what you will encounter in a commercial lease, all of which should be carefully reviewed by a legal counsel. Be on the lookout for the following:
- Rent escalation clauses and similar provisions, including pass-throughs
- Mandatory shutdowns and revenue impairment
- Stipulations on build-outs
- Fees and reimbursements
- Tenant improvement allowance
- Termination rights or options
- Warnings for lease defaults
- Non-disturbance agreement
- Pre-negotiated renewal options
- Owner approval or consent requirements
- Owner rights to terminate or relocate
- Additional services and costs
Remember that you don’t have to sign a standard lease. You can consider the first draft to be just that: a first pass which is open for negotiation.
Step 5: Provide your own counter-terms
Once you fully understand the proposed lease, you can assemble counter-terms. Remember that commercial leases are often signed for a year or several years. Don’t risk getting caught in a lease that has terms you find difficult to align with, or which unfairly disadvantage you.
Step 6: Negotiate through to a point of agreement
With your list of counter-terms, you may define some to be negotiable and others not. The ultimate goal is to reach a point of agreement that is mutually beneficial. To assist you in reaching a point of agreement, consider working with a leasing broker. Having a qualified leasing broker to walk you through the process can be instrumental to having objective, productive exchanges.
Many people entering the negotiations process should be aware of potential disruptors. There are a number of things that can slow down the lease process. For example:
Credit and Qualifications—Do you need good credit to lease a commercial space? Many people have questions about credit worthiness for leasing a commercial space, or other qualifying factors. Individual lessees will have to sign personal guarantees, which means that Fair Isaac Corporation (FICO) scores may need to meet a certain standard. Landlords prefer good credit scores that prove reliability.
Upfront Payments—How do you negotiate free rent on a commercial lease? If you are seeking to lease a commercial space but don’t have much liquid capital, you may negotiate to alleviate some of your up-front cash burden. It may be important to you, but it also may slow down the process, as it adds another dimension to negotiations.
Inspections, permits, renovations and other factors may also affect the timeline of your commercial lease.
5 Tips from a Commercial Leasing Agent to Make Negotiating a Commercial Lease Easier
Negotiating a commercial lease can be made easier by following these five guidelines:
1. Decide in advance what is non-negotiable and what may be negotiable. Settle on a hard and fast price and must-have features for the space. Delineating this clearly, not just hypothetically, will provide clear parameters for future negotiations.
2. Ask for a co-tenancy clause. The one thing you don’t want is to move into a great, thriving strip mall where your small business benefits from a major retailer, only to have that retailer move out. With it could go your drive-through and walk-in traffic. If you envision this drastically impacting your revenues, you may be able to negotiate a co-tenancy clause.
3. Always negotiate in favor of flexibility for your business. Especially with long-term leases, you never know what the future holds, and the more room you have to change, the better. Carefully consider the wording for things like sub-leases, termination clauses and assignment clauses.
Pro tip: Take your time and avoid hasty decisions when negotiating a commercial lease.
4. Study tenant improvements. It is essential to truly assess what improvements you will need to make, and to tally up how much it will cost. Tenant improvement allowances may be provided for by your landlord, or you may be able to negotiate rent abatement.
5. Take your time. The ticking time clock you may feel can drive you to make hasty decisions and shorten negotiations. Revisit your clearly defined list of what you must have and be sure you are getting that, and nothing less, for the right price.
5 Common Ways to Get a Lower Price on Monthly Rent
Here are some ways to get a lower price on rent:
1. Be open to a longer-term lease, for a lower price. As many negotiation factors come down to money, it may be possible to get a discount up-front, or a lower monthly price, by signing a longer-term lease. This is because the landlord will have reliable income for that duration and is more willing to trade that security for a reduced rate.
2. Negotiate the fixturization period. You may be able to get free rent for the period of time you need to redo or renovate a space. If you are making in-depth changes to the building, consider asking for as much as 120 days of free rent to offset the time you won’t be making money in the building.
3. Find out what perks are available and ask for them. Base rent and lease structure may be less negotiable than the additions, like free parking, maintenance fees, shared utilities or more. This may not save money on your rent check, but it will decrease your overall expenses.
4. Counter the base rent price you are offered. This is what a landlord will probably place in a first draft of your lease, but it isn’t what you have to pay. Counter-offer at another rate, sometimes as much as 15% lower, and see what they come back with.
5. Look for free rent deals. Some landlords and even commercial real estate agents will incentivize new tenants with free rent, sometimes for several months. This promotion can result in an overall discount on rent for many years.
**Page updated on January 2023