Before speaking with your landlord or realtor about renegotiating your commercial lease, consider these questions.
For brick-and-mortar business owners, a commercial lease can be one of the biggest expenses—if not the biggest—on their monthly balance sheet, so shrinking that expense can be a boon to the business’s bottom line. But lease negotiations can also have long-term impacts, as most commercial leases run five to 10 years, says Renae Breitbach, a licensed commercial real estate broker at Amerimar Business Centers, in Indianapolis, Indiana.
While you’re considering your next step, Breitbach recommends small business owners ask these four questions to get the best deal possible.
1. Is My Current Lease Up for Renewal?
“Landlords typically like to start negotiations a year before the current lease’s expiration,” says Breitbach. Receiving the proposed new lease is an easy and natural time to kick-start negotiations. If you want to broach the topic earlier in the lease term, you may find your landlord is a less receptive audience.
That’s because landlords typically amortize the cost of upfront expenses, such as construction costs to make an office turnkey or providing a build-out allowance in a retail environment, across the entire term lease. If you try to renegotiate three years into a five-year lease, the landlord is still likely factoring in those upfront costs.
The one easy exception, Breitbach says, is if your business has outgrown the current space and you’re interested in moving into a second or larger area owned by the same landlord. At that point, you’re effectively negotiating a new lease on a new space.
2. Do I Want to Do It Alone?
Tenants tend to be at a natural disadvantage when it comes to leasing negotiations because they’re less experienced than most landlords (and the commercial real estate brokers they may have on their teams). But you can tilt the odds in your favor by hiring a broker for yourself, something Breitbach always encourages people to do.
3. Have I Done My Homework?
Either your broker—or just you, if you decide to go it alone—should make a few phone calls and do some comparison shopping. Maybe subway construction in your area has caused foot traffic to plummet and similar spaces are now leasing for far less than you’re paying. Or maybe you’ll find that the rate your landlord proposes is actually under the current market. Either way, having that information handy will make it easier to negotiate. “Think of it like buying a home or buying a car,” says Breitbach. “You wouldn’t make an offer on the first thing without seeing what other options cost.”
4. What Am I Willing to Give Up?
In terms of services and amenities, leases can vary wildly. “Many landlords tend to handle HVAC and major construction, in part to maintain the building’s integrity,” says Breitbach. But if you want to assume HVAC duties, for instance, that can be a negotiating chip that might score you cheaper rent.
Comb through your lease to see exactly what’s included, and then run the numbers of whether shouldering those expenses yourself or eschewing certain amenities might make sense. Be mindful, though, that you’ll have less room to renegotiate if you’re in a large office park, where certain services (say, a doorman or janitorial services) are spread over all commercial tenants, and having one person opt out won’t save the landlord any money, she says.
Whether you choose to renegotiate or not, it’s important to understand what’s included in your lease and how certain changes to your business, such as expansion, can affect it.