5 Tips for Negotiating a Commercial Real Estate Lease

HOUSTON: For companies seeking office, retail, industrial or healthcare commercial spaces, their leasing costs are traditionally one of their highest fixed capital expenses. Commercial tenants need to understand how to negotiate favorable lease terms to position themselves for success before signing:

1)    Term Length
Start-ups or high-growth companies, for whom flexibility is paramount, may seek shorter-term leases with options to renew or to have expansion rights. More established organizations may prefer a longer term in order to establish stable and predictable leasing expenses. A longer term lease allows a tenant to negotiate greater monetary savings because they are guaranteeing a longer stream of revenue to the landlord.

2)    Look for Hidden Costs
Your lease may be a “gross lease,” in which all costs are included, or it could be a “NNN lease” in which there are costs in addition to your base rent. NNN leases are commonplace in retail and industrial leases. Many commercial leases make the tenant responsible for costs such as maintenance or upkeep of common areas. Get the details on these costs up front and negotiate this section to be as favorable as possible. Find out if your business will be responsible for specific systems maintenance and learn the current conditions of those systems so you can estimate costs. Push for caps on increases to avoid large, unexpected cost spikes that can throw off expense forecasts.

3)    Tenant Improvements
Tenants can often negotiate tenant improvements, since they increase the long-term value of the landlord’s asset. In negotiating for build-outs, understand that landlords seek to recoup their contributions through other lease terms, such as in determining rental rates. Tenant Improvement Allowances are more likely to be distributed with longer term leases.

4)     Favorable clauses
Assignment and subleasing rights are essential lease clauses that guarantee tenants have adequate flexibility as their businesses undergo growth and change. For example, a clause allowing you to sublease the property can be important should your business suddenly relocate or close. You may want to ask for a clause that restricts the landlord from renting out any other unit on the premises to a business similar to yours. Make sure you are allowed to put signage up for your business, etc.

5)    Termination clauses
It’s paramount to understand the lease terms as it pertains to default and termination of the lease. You’ll want a clause that allows you time to cure a default before eviction, particularly one that allows you to pay one month’s rent instead of the entire amount owed on the lease. You will want to negotiate any penalties for early termination of the lease should you decide you need to leave before the lease term is up.

For further assistance please contact Arjun Mohindra, Principal at Apogee Commercial Real Estate. Phone: 713-392-3998 or Email: arjun@apogeecre.com or visit www.apogeecre.com