By Jeff Grandfield and Dale Willerton – The Lease Coach
Retail tenants should not be afraid to negotiate assertively on the rental rate. So why do retail tenants have such difficulty in this area? Frequently, the answer is a simple unawareness of market rental rates (or the “going rate”) in an area.
Let us explain. Suppose the leasing agent or landlord wants you to pay $25 per square foot on new lease space (or even on a lease renewal). However, you know that every other tenant in the building is paying rent ranging between $18 to $20 per square foot. Armed with this information, you would have no difficulty justifying your negotiations would you?
Retail tenants often mistakenly believe that the agent or landlord wouldn’t dare ask for more rent than the space is worth. Consider, however, that the landlord is paying the leasing agent commission not just to lease the space, but to lease it for the highest rent possible - and to the best tenant available. Commercial landlords justifiably want to maximize the return on their real estate investments, which is entirely acceptable.
Here are eight strategies for lowering the rental rate on commercial leases:
Talk with other tenants in the building. You can learn a lot about the landlord’s property management practices, how tenants are treated, how approachable the landlord is and so on by approaching current tenants. Tenants will often tell you whether they plan to stay or move, if their rent is excessive and other inside information only existing tenants know about.
Shop Around. Even if you’re in love with one property, conspicuously seek out other options as it pays to create competition for your tenancy among several landlords in one geographical area. Leasing agents and landlords will often soften on asking rental rates when they realize you have sought out leasing options. Remember that you are the customer. Don’t hand the landlord your tenancy on a silver platter – make him/her earn it.
Let the landlord make the first offer. It’s much easier to negotiate when you see the business terms on paper. Suggest that the leasing agent or landlord e-mail you the Offer To Lease. Typically, the deal will never get worse than the first Offer or Proposal presented so you can measure your negotiating progress by comparing where the deal started and where it finished. Frequently, the first Offer is padded with room for negotiation - so never accept the first Offer outright.
Flinch. No matter what rental rate you’re offered, flinch a little. Act surprised that the rent is so high. Frequently, the agent’s first offer is made to test you, to see exactly how you react. If you look visibly relieved or even pleasantly surprised by how reasonable the rental rate is you can be sure it won’t come down.
Ask for justification. Question what other tenants are paying, specifically those who have recently moved in or renewed their leases. This is called the prevailing rate. When you learn that a tenant is paying $25 per square foot don’t stop asking questions there. Inquire about the incentives they received. How many months of free rent or how much tenant allowance money did the landlord give the tenant so they would agree to pay $25 per square foot?
Wait to Counter-offer. When you receive the leasing agent’s first Offer to Lease (or lease proposal) don’t counter-offer right away. If you have no fear that the space will be leased to someone else it can often work to your advantage to wait a few days. Even let the allocated response time lapse so you can counter-offer on your terms. Agents know that tenants can be influenced by artificial deadlines that are just that - artificial. When making your counter-offer you can do so by way of a separate letter stating your terms, or by changing the original document, initialing the changes, signing it and sending it back.
Walk away from the negotiating table. If, after receiving the landlord’s most recent counter offer, you determine the terms will still not work for you, advise the landlord or their agent you are going to take some time to consider it further or explore other options. We have effectively done this for our clients and seen the rental rate drop by more than $10 per square foot from the landlord’s original asking price.
Offset the Rent with other incentives. Sometimes the landlord won’t budge on the rental rate. This is not the end of your negotiations. Frequently the landlord will concede other incentives such as free rent or more tenant allowance dollars in order to achieve his/her rental goals. If you can’t bring the rent down can you get the incentives increased?
For a complimentary copy of our CD, Leasing Do’s & Don’ts for Commercial Tenants, please e‑mail JeffGrandfield@TheLeaseCoach.com.
Dale Willerton owned a number of businesses requiring him to be a commercial tenant before getting into commercial real estate. His interest in commercial real estate led him to work for landlords as a shopping centre manager where he leased space to tenants. In 1993, Willerton realized it wasn’t landlords who needed his help, it was tenants. Therefore, Willerton switched sides and became The Lease Coach
Jeff Grandfield is a senior consultant with The Lease Coach. Grandfield completed his honor’s degree in business administration with a designation in Marketing from Wilfrid Laurier University. It was the challenge of the real estate industry and satisfaction of working with business owners of all types and sizes that drove Grandfield to join The Lease Coach in 2005.
Dale Willerton and Jeff Grandfield - The Lease Coach are Commercial Lease Consultants who work exclusively for tenants. Dale and Jeff are professional speakers and co-authors of Negotiating Commercial Leases & Renewals FOR DUMMIES. (Wiley, 2013). Got a leasing question? Need help with your new lease or renewal? Call 1-800-738-9202, e-mail DaleWillerton@TheLeaseCoach.com or visit www.TheLeaseCoach.com.