Some tenants believe that securing a great rental rate is their only responsibility in lease negotiations. Let the attorneys handle the rest. Big mistake, and a costly one at that. There are many other business decisions that are the tenant’s responsibility to be aware of and bring up during the lease negotiation process. Here’s are the top 5:
Option to Extend: What’s better, a 10 year lease or a 5 year lease with a 5 year option? While both are essentially 10 year leases, only one of them provides you with a decision point where you can choose to end your lease after 5 years. If your business doesn’t succeed, your only obligation is for the first 5 years, and the option gives you a way out. On the flip side, if your business does succeed and the landlord is aware of your success, he may want to cash in on that success when your lease expires by asking for a higher rent knowing that relocation may be too expensive. As a tenant, you have the upper hand. Take those options (and as many as possible).
NNN and Taxes: This topic actually deserves its own post. If your lease is a NNN Lease or you are reimbursing the landlord for taxes, pay attention to these: (a) prior to reimbursing the landlord, request copies of invoices and paid checks. Reimburse only after the landlord has shown proof of payment. If the landlord escrows the payments on a monthly basis, demand a CAM Reconciliation, with copies of invoices and checks at the end of the year. (b) items like real estate taxes are required to be paid on an annual basis (or twice per year). Choose the option to pay that’s similar to how the landlord pays, or escrow on a monthly basis. However you do it, be sure to ask for copies of invoices and paid checks. (c) ensure that your pro-rata share is calculated correctly. All the amounts are multiplied by your % Share. If that % is higher than what it actually should be, then you are paying a higher amount of your actual share. Your pro-rata share should be equal to Space Size/GLA. (d) if your lease is a gross lease and you are reimbursing for increases in taxes, CAM or insurance, make sure that your base year amounts are properly calculated.
Non-Compete: The success of your business not only depends on your location, but also on the surrounding competition. Sure, many tenants will have a non-compete clause in their lease prohibiting the landlord from leasing space to tenants with a similar business in the same location, but how many ensure that the same landlord does not lease to a similar business in any other shopping centers he may own in the same area? You may not know it, but the same landlord may own a shopping center across the street and decides to lease it to a similar business. Will competition directly across the street hurt your business? It sure will. Do your homework and make certain that the non-compete not only includes the shopping center your space is in, but also the shopping center in a 3-5 mile radius the same owner may own.
Security Deposit: If you’re a nationally recognized tenant you may have the power to negotiate a $0 security deposit. Since most tenants are not, commercial landlords ask for 3 or 4 months of security deposit upfront. That could be a big number! Why does the landlord need to hold on to so much security? A security deposit gives the landlord comfort that in the event you vacate before your end date, your security can be used to re-lease the space. That’s true, but does he still need that much ‘security’ if you have proven to him that you are a good tenant and intend to stay there long term? Ask for some of your security back after a certain period of time. Negotiate that the landlord returns one month of your security back to you after year 3 and another after year 7, provided that you have been paying on time and are not then in default. You’ll be surprised how many will agree to give you back your security before your lease is over. The money is better off in your hands and working for you, rather than your landlord.
Limited GuaranteesFinally, don’t sign away your life. Landlords want the full term of the lease guaranteed, especially when there are build-out and commission costs involved. Limit your guarantee to a specific dollar amount that depreciates every month. For example, let’s say that you sign a 5 year lease. The landlord spends $50,000 in commissions and build-out. Agree to a $50,000 guarantee that will depreciate by $10,000 per year. So, if in year 3 you decide to terminate your lease, your liability will only be $20,000. – What has worked for you? As always comments & additional negotiation points are always welcome!