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Five Tips on How to Negotiate a Commercial Lease

March 5, 2019 / by Ed Douyon

Modern Office SpaceIf you have a great commercial lease for your business, consider yourself fortunate. And don't take it for granted. Things can change at any time.

I had a client who had been in the same location for more than 20 years when the landlord summarily decided to raise the rent by $25 per square foot. With just a few months' notice, we had to scramble. We found a good building, and the prospective landlord loved my client — but evidently not enough to avoid nickel-and-diming them to death when it came time to sign the lease. I guess the landlord figured he had my client over a barrel because time was so short.

The landlord figured wrong. My client nixed the deal and continued looking. In the end, we found them an even better location, with a favorable sublease. Moral of the story: You don't have to let the landlord call all the shots when you negotiate a lease — even in a tight market like New York City (where my firm operates). The following are five tips to help you get the best terms.

1. Know Your Market
If you want to negotiate the lease from a position of strength, work with a broker who can show you the relevant options in a market. Context is key when negotiating. A market survey will not only give you an idea of the going rate in your targeted location but will also give you information you can use to negotiate a better deal.

That's one of the simplest and most effective ways to approach a relocation or renewal. You're much more likely to end up with the best rate for the best building. This is why it is important to hire a tenant representation broker.  

2. Expand Your Horizons
Even in a competitive market like NYC, rents can vary greatly by location. Midtown South, for example, is an extremely tight submarket due to low supply and high demand. Therefore, prices there are relatively high and show no sign of dropping anytime soon. But then there are situations like Midtown East, where there's been some rezoning and prices have seen a slight dip. So, unless you're locked in a particular area for logistical reasons — if you require proximity to a major client or particular transit hub — try to be flexible.

3. Plan Ahead
A rental rarely works out just right for both parties. Let's say your lease is only half up when you're forced to downsize your company. Continuing to pay for more space than you need seems wasteful, particularly if you've been forced to cut back in other areas. But what choice do you have?

It depends on your landlord. In many cases, adding a liberal sublet clause to the lease is the most preemptive approach to making sure your firm’s real estate needs are flexible and in-line with your firm’s business needs.

The same is true in the opposite case, when you think your business is liable to grow. Let’s say you’re a large financial services firm with good credit and your occupancy is more that 25% of a building. You can put a clause in the lease giving you first offer for any larger spaces that become available. So if you're on the 10th floor and the 11th floor becomes available, the landlord could give you the opportunity to take that space if you need it or refuse it if you don't.

(Incidentally, if you're an entrepreneur whose startup is still in the planning phase, you ought to consider an alternative like WeWork before taking the plunge and renting full-fledged office space. Your broker can help you structure these deals too.)

4. Read the Fine Print
As in any other walk of life, a lease arrangement that seems too good to be true probably is. A lot of times the landlord will dangle an attractive initial offer that includes a fixed escalation of 3%, which is ridiculous. You start out paying $40 a square foot, and with that 3% escalation compounding each year, you're paying $55 a square foot at the end of the 10-year mark.

Loss factors are another hidden cost. A loss factor is the amount of common space in a building that the tenant gets charged for but doesn't actually use. So if you're paying for 10,000 square feet and your loss factor is 30%, you're really only getting 7,000 square feet of usable space.

Sound outrageous? It's not. The average loss factor in NYC is 27% on the full floor and 33% on the partial floor. That's egregious enough, but some buildings run close to 45% on a partial floor.

5. Don't Go It Alone
Finding the right lease can be complicated and time-consuming. And if you sign the wrong lease, you could be in for a long-term headache. I strongly advise you to use a tenant broker since New York landlords can be shrewd and tough — and the same goes for plenty of other locations. As a tenant, you need an ally who can put you on equal footing.

Ed Douyon is Associate Director at Norman Bobrow & Company, Inc., a commercial real estate agency in New York City.

Topics: Small Business Advice, Manhattan Financial District, NYC - Midtown, Tips for Startups, Business Advice

Ed Douyon

Written by Ed Douyon

Associate Director at Norman Bobrow & Company, Inc.

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