Negotiating 101

Posted by: Garrett K.

Top 10 Ways to Negotiate for your Commercial Space

1. Move in Date

If a space has been vacant for a long time, the owner is usually more willing to deal. If you can’t meet the landlord’s rent needs, but are willing to take the space right away, the landlord might be more willing to bend on the rent.

2. Monthly Rent

The common rule of thumb is to try and negotiate the asking rent down 5-10%. The leasing market gathers its pricing data from market comparables which are other companies signing leases. Data is currently traded among brokers so they can make sure their clients are receiving the most appropriate rental rate and terms. If you don’t have a broker or if your broker isn’t aware of the most recent deals completed, then a barometer of a 5-10% discount is a fair goal.

Now you can check your current and or new rent against current market averages with our Rofometer

3. Tenant Improvements

If the space is not ideal, try to negotiate so the landlord is responsible for all reasonable changes to the space. The longer term lease you are signing, the more willing the landlord should be to perform significant improvements.

See The Landlord’s View to see how landlords view the process.

A good rule of thumb is if you are looking for short term space, then gear your search to spaces that need almost no improvements. If the term is below two years, even asking more new paint and carpet might be a too much to ask for.

4. Free Rent

The amount of free rent depends on the current market conditions, your financial statements, and the term of the lease.  With Shorter term leases (less than 2 years) it is tough to negotiate free rent because you are only there for a short period and the landlord wants you to paying the whole time.  If it’s a five year lease, 3-5 months of free rent would not be unusual. Most justifications for free rent are that free rent is covering the expensive moving costs and other expenses associated with the move (e.g. stationary, wiring the space etc). If you are a start-up without revenue, the landlord will be hesitant to provide rent abatement because of their concern that you may default after 6 months and they will have provided free rent for 3 months. You may be able to negotiate the free rent after fulfilling an agreed upon minimal paid rent period. It doesn’t hurt to try!

5. Term

Landlords prefer a longer term lease because a space, on average, sits for 5 months vacant between leases. The less down time, the better it is for the landlord’s bank account, and so he will want a longer term agreement. What does this mean to you?

If you are comfortable signing a 3-5 year lease, you can get more aggressive on the economics (rent below asking, free rent, more improvements etc). One way to avoid a longer term commitment is to get termination rights written into your lease. This typically includes a rent penalty (3-6 months of rent), plus the payment of unamortized commissions and tenant improvements.

6. Furniture

Make sure you specify up front whether the furniture is going to be left after your lease expires and if you will be responsible for purchasing the furniture. It is expensive to move and a hassle a small business doesn’t need! Your best bet is to negotiate free use of the furniture and the right to purchase it at the conclusion of the lease should you want to take it with you to your next location.

If you need to purchase furniture, please see Rofo’s Recommended Furniture Suppliers to do it affordably!

7. Upfront Costs

Larger companies have the ability to get landlords to contribute to the upfront costs of the move process. This can only be negotiated during times where the market has a lot of vacancy. Small business typically can accomplish this same concept through free rent (see #4 above).

8. Security Deposits

Security deposits are typically a function of how much money a landlord will spend to get you to move into the space (commissions and tenant improvements) vs. how confident they are in your ability to pay rent (financial statements review). We have seen security deposits range from 1-12 months depending on the situation. A good rule of thumb is 1-3 months of security deposit for a small business who needs only minor improvements.

9. Commissions

If you are not represented by a tenant rep. broker, you can try to use this as a lever to deduct the proposed fee amount from your total rent obligation.

10. Options

Renewal Options, Termination Options, and Expansion Options all should be negotiated. These options provide you with the most flexibility and control of your office lease.

Last updated: 10.08.2008 11:05 AM