As the commercial real estate market bottoms out, commercial tenants will find it harder to extract huge concessions as they negotiate commercial property leases. However, come in prepared, you can still negotiate favorable lease terms. Get a lower lease rate and perhaps your business can introduce that new product that will improve your bottom line.
Knowing that each combination of property, landlord, location and tenant requirements is unique, there are common things you can do to gain a negotiating advantage. Some terms will reduce your lease expense, others will you save headaches and frustrations. So what lease terms are negotiable? Never assume that some terms are off the table. In most instances this won’t be the case, but you will find some landlords are willing to negotiate terms that others won’t. Here are some great tips from Dee Sampson a twenty five year veteran Orange County Commercial Real Estate Broker that will help you become “lease-savvy”.

Know the market. “I can’t say enough how critical it is to do some research,“ starts out Ms. Sampson, “to negotiate a lower lease rate you need actual examples in your local market.” For example, if a property owner is asking for $12,500 a month rent on a 5,000 square foot Class A office property, that equals $2.50 per square foot of leased space per month. If you can show similar properties that leased for $2.30 per square feet, you would counter with $11,500 ($2.30 x 5,000) as a more appropriate market based rent. Assuming you were able to get that rent, you would save $12,000 in the first year! Assuming a rent escalation rate (more on that later) of 3%, your savings would be $12,360 in the second year and $12,730 in the third. You just saved over $37, 000! “Landlords . But for example, I was able to save a construction company in Orange County $13,200 by lowering their lease rate in the amount of $.11 per square foot on a 10,000 square foot warehouse” says Dee, “ but to get that done I needed market facts.”

Know the landlord. Another bit of research that can help you save money is to know something about your landlord. If you are dealing with a large corporate landlord it is often not to difficult to find out concessions they have made on other properties. Also, many large corporate property owners manage properties as multi-property portfolios and therefore sometimes they will offer discounts on one property to influence the overall performance of the entire portfolio. For example, you might be able to negotiate a lower lease rate when the corporate owner is eager to lease space so that their entire portfolio will have a higher occupancy rate.

Negotiate rent escalations. Landlords will insist on annual increases based on the percentage increase in the Consumer Price Index (CPI) or, based on a fix rate. Realizing that that the Federal Reserve recently reported the Fed Funds rate should stay between 0% – 1/4% through 2014, your preference should be to tie the rent escalations to the CPI. When negotiating a CPI linked rent escalation, put a limit on the amount of each year’s increase. Recently Ms. Sampson was able to negotiate a five year lease for a hair salon in Mission Viejo where the rent escalation did not kick in until year three.

Permitted use of the premises. The permitted use of property is not a financial term, but it can very important. You want this clause to be as flexible as possible. Over a three year lease your business might change. Favorable permitted lease terms will also give you more flexibility if you ever want to sublease (also a negotiating point) space to another business. “Conversely,“ adds Dee “for a Dentist in Newport Beach I was able to negotiate the terms so that another dentist could not lease space in the prime location retail plaza where he leased. A good lease can sometimes ward off the competition.” Before you sign a lease, you also have to research any local zoning restrictions that might apply.

More and more. There are, both for financial and operational reasons, many more terms of the lease, which can be negotiated to your benefit. Tenant improvements; Repairs and Replacements; Common Area Maintenance; Right of First Refusal; Option to Renew; all can be negotiated. “Ultimately, if a property owner is difficult, makes unreasonable requests, or will not make market based concessions, lease space elsewhere,” advises Dee. Her best advice: have a good commercial real estate broker and lawyer on your side of the negotiating table. The lawyer will usually charge a flat fee and the services are of an experienced commercial real estate broker do not cost the tenant anything. For a copy of a Complete Guide to Negotiating Office Space you can contact Dee Sampson at dee@mullercre.com.