If you are about to start a new business, relocate an existing one, or open a new franchise and need to rent commercial office or retail space you must prepare yourself for lease negotiations with the landlord. I have been involved in over 300 lease transactions and have come up with the following 10 questions that tenants MUST ask during the commercial lease negotiation process. By doing this you will put yourself in a much better position.
1. Who is the Landlord or Building Owner?
Landlords and building owners come in all shapes and sizes. Are they a large institution, a bank, or a small independent owner? Depending on who they are you might have to use different negotiating approaches.
2. How Long Has the Landlord Owned the Commercial Property?
The longer the landlord has owned the property the more likely they are to retain interest in owning it. Because they may have bought at a time when prices were low they make money whether market rents are high or low which means they don’t worry about market rents as much as others. New owners more than likely have a higher mortgage which means they have to ask for higher rents to cover their costs.
3. Where is the Landlord Physically Located?
Landlords that are local are typically easier to deal with and access thus decisions can be made more quickly. Some landlords that are located in other states are harder to get ahold of and decisions can take much longer to make.
4. Is the Property Management Company Local?
This is similar to the preceding point. If they are local they are more accessible to handle any concerns or questions you have. If they are in a different city then things may take a few days longer to get done.
5. What is the History of the Building?
An older building may require more maintenance and upkeep which tenants ultimately pay for via common area maintenance (CAM) charges. These are also known as operating expenses or triple nets (NNN). Has their been high turnover by tenants in this building? Has a similar use tenant ever relocated or shutdown at this location?
6. Who Does the Leasing for the Property?
Who is responsible for doing the leasing for the landlord/owner of this property? Is it a large leasing brokerage, and individual real estate agent, or the landlord’s family member? Knowing who you are dealing with will help you determine your approach.
7. Who Were the Most Recent Tenants to Move in and When?
It’s always a good idea to talk to these tenants and find out what their lease negotiation experience was like. If the commercial listing is new to the agent and they don’t have any details on this then find out.
8. Who Were the Last Two Tenants to Move Out?
Why did they move out and when? Where did they move to or did they shutdown their office altogether? Find out what you can and if possible follow up with those tenants to find out why they moved.
9. Who is the Property’s biggest Tenant (AKA Anchor Tenant)?
Anchor Tenants typically lease the biggest space in the building. Find out how long they have been there and how long their lease it. For retail properties they typically attract the most traffic so be sure that they are staying. If they move it could have an impact on your business. As an example a grocery store is a great anchor tenant to lease next to as they attract a lot of traffic and don’t move often. However they could relocate their business but continue paying rent in the old space, thus keeping any other competitor from moving in.
10. Is the Building for Sale or Does the Landlord Have Plans to Sell?
Building owners have different investment strategies. If they are planning to sell they may try to increase lease rates thus increasing the value of the building. If they are going to hold for the long haul they may not worry about “market” rates as much and focus on keeping the building occupied.
You might not be comfortable asking the questions above however landlords and leasing agents will generally provide you answers. As a tenant you have every right to know about the situation. Before you go look at space or enter negotiations I would suggest you print a copy of these questions and refer to them in your discussions.