A New Lease on Commercial Property
My company leases a 6,300-square-foot commercial building. Our renewal is coming up in a few months, and we'd like to have the landlord pay the property taxes, replace the heating and air conditioning unit, and put on a new roof. We also do not want a triple-net lease again. What is the best way to handle negotiations?--A.G., Seattle
As with most real estate questions, the best way for you to handle renegotiating your lease will depend on the location of your building and the current state of the rental market in your area, experts say.
Let's assume you have an automatic right to renew the lease, with the rent and terms of the lease remaining relatively stable. In that case, you need to do some research now to determine market conditions and how they will affect your negotiations. Are you in a highly desirable area where occupancy rates are tight and demand increasing? If so, your chances of getting a more favorable lease and moving away from the triple-net arrangement you have now are going to be poor.
But if the commercial real estate market in your area is weak, you may be able to wring some concessions from your landlord before you commit to renewing, says David M. Eichman, a West Hollywood (Calif.) attorney who specializes in real estate.
GET THE FACTS.
You will probably have to be in a fairly strong negotiating position in order to change the legal status of the lease. The triple-net lease requires the tenant to pay property taxes, insurance, and most -- if not all -- repairs. By asking the landlord to take over payment of property taxes and major repairs, you are putting more of the cost back on the landlord, which landlords try to avoid.
"I would suggest you hire a real estate broker in the area to conduct a comparative market analysis, including other available buildings...that are vacant and that you could move into upon expiration of your current lease," Eichman says. "Then provide this information to the landlord and try to negotiate a new lease."
John Logan, an attorney at Minor, Brown PC in Denver, specializes in commercial real estate leases. "If other tenants in the area or in similar buildings have terms like you want, this will help you in negotiations," he notes. If they will strengthen your bargaining power, approach your landlord with the actual market numbers unearthed by your investigation.
IT'S YOUR MOVE.
You should also figure out specifically what it will cost you to find a new location and move, Logan suggests. "Many times, those costs outweigh the cost of slightly higher-than-market rent," he says.
Keep in mind, however, that landlords don't like the uncertainty and the cost of finding a new tenant. "If you have been a good tenant, now is the time to tell the landlord that while you would like to stay, there need to be a few modifications to make it work for you economically," Logan says.
Go into the negotiations with a good understanding of market conditions and hard numbers to back up your assertions. If you are prepared, and the data favor your argument, you may very well be able to get much of what your business needs. Good luck!