COMMERCIAL REAL ESTATE LEASES (PART 2)|
There is no short cut, quick and easy approach, or sure fire way to get the best deal possible. However, here are some tips to getting closer to an eventual good deal:
In the end, there is no substitute for experience. Length of service sets the stage for gaining experience. And, hopefully, some wisdom comes from this experience. I urge you to keep this in mind when selecting a real estate broker/agent, attorney, and other professionals to work on your next lease.
- Know the Market: Negotiating changes in a lease depends largely on the tenant's strength in the market. Knowing the market not only includes understanding the market generally but also the specific market for the type of space, type of use and type of tenant in the specific location of the Premises. For this and many other reasons, carefully chose the real estate broker/agent you will be working with.
- Consider Both Short-Term and Long-Term Issues: Too often the tenant is overly focused on the short-term issues in the lease, such as completion of tenant work being done by the landlord and the moving-in process. Longer-term issues such as expansion rights and Additional Rent issues need equal attention.
- Be Reasonable in Your Request for Changes: A 3,000 square foot tenant in a 100,000 square foot building is not going to get a lot of changes to the landlord's "standard' lease. So pick your fights carefully. In addition, asking for unreasonable changes reduces your credibility and can backfire. Knowing what changes are reasonable is part of the value an experienced and knowledgeable attorney brings to lease negotiations.
- If You Don't Understand It, Don't Sign It: Some leases are just plain awful. Sentences don't make sense. Subjects, verbs or objects are missing. Arcane language is used as though it conveys some ancient truths. Definitions are missing or used incorrectly. The minimum requirement is that you ought to know what each provision means.
- Choose Your Landlord Carefully: Some years ago a long term client of mine and I were in face to face negotiations with a prospective landlord. The co-owners of the property included an attorney who seemed to truly enjoy the battle-aspect of negotiations. This attorney/owner would debate and fight about proposed changes that made perfect sense and did not adversely impact the landlord. After a very long four hour session, we ended for the day. Within minutes after the client and I left the "battle", we both agreed that another property had to be found. And so it was. Ten years later my client continues to have a very good relationship with a landlord to whom my client was driven by the first but unacceptable landlord.
There is no guarantee that the landlord you sign with will be the landlord you have over the long term. The best you can do is know that lease negotiations can reveal what the tenant can expect from a long-term relationship with the current landlord.
In addition, always consider the financial viability of the landlord. Ending up with a receiver in bankruptcy as your landlord rarely brings happy endings. From my experience, bad goes to worse and bankruptcy proceedings can go on for years.
- Dollars and Sense: The total dollar amount at stake, let alone the very ability to continue to conduct the business of business, makes these transactions as substantial as any transaction involving your business. The math is simple… The threat to your business can be existential.
- All Good Business Owners Are Good Negotiators: One of the primary tasks of a business owner is negotiation. Most business owners consider themselves good negotiators. However, being a good negotiator in areas where you have training and experience does not necessarily carry over to real estate leases. As one of my clients stated some years ago: "I like to think of myself as a pretty good negotiator, but not when it comes to leases. It's like comparing a baseball game to a football game; both are sports but with important differences."
- It's Just Our Standard Lease: If there ever was, there certainly is no longer such a thing as the "Standard Lease." Assuming the landlord is motivated, a landlord's standard lease becomes quite changeable. The trick is to have the experience and knowledge base to be able to adjust negotiations to current market conditions.
- This Will Only Work If It Works For the Both of Us: Landlords and tenants have fundamentally opposing priorities. Landlords want maximum revenue with minimum risks and obligations. Sayings like "this will only work if it is good for both of us" and "this will be a win/win situation" miss the point entirely. Put another way, trust in God and build on high ground. It is not the landlord's job to look out for your best interests. It is your job. And, to do the job right, you need the right tools.
- "Be Prepared" Is More than Just the Boy Scout Motto: I have negotiated real estate leases for over 25 years. Market conditions have gone all over the place during this period of time. Particular issues have become more important, new issues have arisen and other issues have lost some of their importance. The one constant has been that the better prepared tenant will usually get the better deal. And, the deal is a whole lot more than just the cost per square foot.