10 Steps to More Effective Lease Negotiation

Companies often look at lease negotiations as an arduous process, something to be survived rather than enjoyed. However, determining your space needs for three, five or ten years may be one of the most critical tasks you will engage in for the future of your business.

While many view a rental rate below the asking price as the most important parameter in a lease, many other business terms should be negotiated as well.

1. Free rent

Many landlords will provide two-to-six months of free rent as an inducement to secure the deal. While the main lease rate will determine the profitability of a landlord’s investment for potential buyers, free rent is viewed as a temporary condition. However, when you evaluate the overall effect, this concession can affect your average rent in a significant manner.

2. Tenant improvement allowance

Landlords generally budget $25 to $50 per square foot (depending on the lease term) to attract a new tenant and make the necessary alterations. If your cost to the landlord averages significantly less than this amount, you can often negotiate other concessions in lieu of the higher tenant improvement allowance. Of course, during the negotiating process, you need to differentiate alterations specifically for your company from those improving the space in general.

3. Electric sub-meter

Paying for your electricity usage through a flat rate to the landlord generally turns out to be more expensive in the long run than a meter dedicated to measuring consumption for your space.

4. Security deposit

While this amount will generally depend upon your credit, you can negotiate a “burn down” of the deposit if you pay your rent on time and avoid default.

5. Subleasing

Subleasing gives you flexibility as your space needs change, and you can often negotiate favorable subleasing terms with your landlord. Often, landlords will try to impose onerous restrictions on subleasing rights because the process creates internal selling competition from their own tenants.

6. Operating expenses and fees

While certain operating expenses depend upon the type of lease, you should beware of extra charges for services such as parking and cleaning. It’s always a good idea to avoid tacking additional fees onto your base rental rate.

7.  Contraction or expansion opportunities

Growing businesses can often negotiate to increase the size of their space by expanding contiguously. An exclusive option to expand or contract can result in significant savings and avoid the hassle of continually moving your office to a new location as your needs change.

8. Upfront reimbursements

Landlords who are unwilling to change their base rental rate will often provide additional perks to encourage your acceptance. You can negotiate assistance with moving costs, alterations, consultants, legal fees and much more.

9. Landlord perspective

Knowing your landlord’s business structure and goals can improve your negotiating position. Larger institutional landlords are more concerned with the long-term performance of their assets, their buildings, and will hold out for better terms even if it means waiting for the market to turn around. Conversely, a smaller landlord, who hopes the asset will ensure a comfortable retirement or family income, will prefer the stability of a fully occupied building.  

10. Buyouts

Landlords will often share proceeds of a buyout from a previous tenant via some of the concessions listed above if a tenant just asks.

One last word. Negotiating your lease is just as important for a renewal as a relocation. Avoid accepting the “same terms as last time” when so many of the factors above can improve your situation.