Commercial real estate is a business’s second or third most considerable expense, making any amount of savings or concessions extremely valuable. Regarding commercial real estate leases and the available concessions, what’s negotiable, what’s critical to your long-term flexibility, and how can you create negotiating leverage?
As a tenant-only representation brokerage, we can confidently tell you that everything in your lease agreement (or not in your lease agreement but should be added) is negotiable. Will you win every time? No, which is why you must be strategic and understand which terms in your commercial real estate leases will impact your organization’s long-term commercial real estate health.
First, we should explain what will always be in your lease:
1. Term Length
Term length will define how long of a lease you’ve agreed to. Depending on your industry and property type, this can range from 1-20 years. The longer the lease, the more you can negotiate front-end concessions.
2. Rental Rate
How much will you be paying for your lease? Rental rates can be formatted in MG (modified gross), FS (full service), or NNN (Triple Net). For more information about lease types, check out our blog “3 Commercial Real Estate Lease Types”.
3. Paying Rent & Late Charges
4. Security Deposit
Does your commercial space have available parking? How much does it cost? How many spaces will I get with my lease? Parking is formatted in spaces per 1,000 SF. (ie. 4 per 1000 means on a 1,000 SF lease you would get 4 parking spaces) Parking is not always included in your lease rate in fact, if you have covered parking or park in a structure, its likely all of your parking will be an additional charge.
This is an allotted amount of money given to tenants to customize the space. This concession is usually formatted on a $/SF basis. The landlord has to recoup these costs, so keep in mind the shorter your lease, the less your landlord will offer as an incentive.
7. Mechanism for Operating Expense Reconciliation
Each year, tenants with a full-service lease type will pay operating expenses based on an estimate, usually from a prior year, a “Base Year,” or an “Expense Stop.” If the estimate is below the actual costs of the “Base Year” or “Expense Stop,” the landlord will credit the extra amount paid to the tenant’s lease. If the estimate exceeds the actual expense, the tenant must make up their payments. Negotiating this can be in the form of how much time the tenant will have to respond should additional fees be due.
This clause can vary depending on your lease type; for example, a NNN lease may not have an expense stop or base year to reference.
8. Landlord vs. Tenant Obligations
When it comes to repairs, whose responsibility is it? This can get costly if you don’t specify. For example, if the landlord is going to repave the parking lot, is that the tenant’s responsibility or the landlord’s? If your HVAC goes out, do you pay for repair and maintenance or replacement of the unit, is it amortized over the useful life (meaning the tenant only pays for the term they are in the space using the HVAC)?
9. Estoppel Certificate Procedure
An estoppel certificate is a legal document from the landlord which sets forth the lease’s current terms and establishes no default. This is also a tool used by a building buyer to make sure the Tenant and the Lease match and no undocumented side deals were done that could create issues for both the new buyer and the Tenant when the building
10. Assignment and Sublease
Can you sublease it to another user if the space no longer serves your needs?
Alterations are changes that can be made to a leased space. Keyser tries to negotiate a minimum dollar amount, such as “$10,000,” or a use case, such as “nonstructural,” before the tenant clears the alteration with the landlord.
12. Move-out Provisions
How should the space be left when it comes time for your move-out? Do you need to remove the tenant improvements you’ve added?
13. Insurance Requirements
Keyser typically does not negotiate insurance requirements as they are relatively standard for their industries; however, you should always send the insurance section of your new lease to your insurance broker to look at before signing your lease to make sure everything is in order, and your current insurance carrier can meet the landlord's requirements.
14. In the Event of a Default
In the event of a default from the landlord to the bank, what happens to the tenant and their lease?
Next, the following lease terms may not be included in your initial commercial real estate leases. However, while there is no initial extrinsic value on security and flexibility, these lease terms are critical to negotiate. In a worst-case scenario, these terms can save a tenant thousands to millions of dollars and provide increased flexibility. Flexibility, in the commercial real estate industry, can mean the difference between paying for a vacant office for 5+ years vs. terminating a lease early with a nominal fee.
1. Right of First Refusal
If new space becomes available in your building, the landlord has to contractually offer it to you at the first “potentially accepted tenant” rate as an expansion opportunity before releasing it to said tenant. This is important if you are a growing company as a big move or taking on separate space in another building and separating your staff can be costly from both a financial standpoint as well as a cultural standpoint.
2. Termination Rights
Commercial real estate leases are traditionally one of the least flexible agreements you can enter. You can lay off people but can’t stop paying a lease, even if you file for bankruptcy. But what if a lease no longer suits your needs? What if you outgrow your space? What if you want to have your entire team go remote? It looks like you might need a termination option. It’s more common than you’d think—you can probably imagine after what happened in 2020…
3. Cap on Controllable Operating Expenses
These fees can include management fees, premiums for insurance, union-related labor costs, snow removal costs, security costs, Permitted Capital Expenditures, costs of water, sewer, electric, gas, oil, or steam, and other utility or regulatory charges and expenses which are caused by reason of changes in the law.
4. Updated Base Year
If the tenant executes a blend-and-extend renewal, the tenant can request an updated base year. Base years limit the operating expenses, and once the base year is set, the operating expenses cannot go up for the remainder of that year.
“Leases typically have a subordination, non-disturbance, and attornment (SNDA) agreement. If a new owner purchases your leased property, without well-negotiated SNDA language, they may have the right to strike your agreement, evict you, or negotiate a new agreement despite the terms of your old agreement. With strong SNDA language, you’re guaranteed non-disturbance if the building ownership changes--meaning that your new landlord will need to wait until your lease expires to negotiate any new terms.” —Jonathan Keyser as featured in Inc.
6. Right to Audit Landlords Books
Executed by a third-party accountant, the tenant can negotiate their ability to audit the operating expenses of their landlord at any time. There is a lot of money left on the table by tenants that don’t know this is an option they can have in their lease.
7. Holdover Rights
Let’s say you’re relocating, and construction is delayed by three months. Where do you house your business? Without holdover rights, you can be booted out of your space or charged up to 400% of your standard lease fees.
8. Ability to Share in Sublease Excess Proceeds
If you do end up subleasing your property and the market is in demand, can you profit from your subtenant?
The best way to secure incentives and concessions and create leverage in your commercial real estate leases is to hide your “cards” and hire a tenant broker (after all, the commissions are paid by the landlord, so there’s often no out-of-pocket cost to the tenant for a new lease agreement). Ensure your broker is free from conflicts of interest and does not represent your future landlord or any parties you may negotiate against. Conflicts of interest— meaning they or any agent at their firm represents the landlord—force brokers to act in the landlord’s best interest ahead of you, the tenant. A conflict of interest means your representation may not be able to help you secure optimal concessions, better deal terms, or tenant-friendly language when it’s at the landlord’s expense—and you might not even be aware.
Next, your broker should deploy the right negotiating strategies for your situation. Keyser has 30+ standard tactics that can help create leverage on your behalf, and the real trick is knowing the right situation to use them in. Jonathan Keyser shares some of his classic negotiating strategies in his Forbes article, Four Commercial Real Estate Strategies to Help Tenants Gain the Upper Hand.
Keyser specializes in lease agreements for 10,000-200,000 SF office, industrial, or specialty properties. If you’re interested in a free lease review, you can request one here: keyser.com/lease