Commercial Lease Negotiations

Lease Negotiations With A Negotiation Team

In the past, corporate managers and business owners frequently were able to make major real estate decisions on behalf of the business on their own. Now, a negotiating team will often be used in negotiating leases. This team may consist of legal counsel, finance department representatives, outside specialists such as real estate brokers or tenant representatives, design and engineering consultants, and others.

In today’s market, corporate tenants with high credit ratings who are willing to make long-term lease commitments negotiate from a strong position. Therefore, corporations that formerly treated real estate transactions in a casual way have now developed detailed real estate negotiating strategies. The corporate tenant sees these negotiations as a way to cut costs within the company, whether upsizing or downsizing are in their plans.

Landlords, developers, and brokers should be aware of this style of negotiation. While the real estate executive plays a key role in developing the strategy, the other parties must be ready to respond quickly to requests for information and be prepared to discuss issues that rarely if ever arose in the past.

Request For Proposal

The document utilized in the negotiating process is the Request For Proposal (RFP) sent to property owners, landlords or their real estate brokers. The RFP incorporates the spelling out of rental rates, free rent, improvments, operating expenses, renewal options, cash incentives and other clauses dealing with financial terms that the corporation intends to negotiate. A short list of prospective sites or buildings is then prepared based on the initial responses to the RFP. The corporate executive, often with the aid of a real estate broker, will negotiate to obtain the best deal with prospective landlords.

The RFP usually contains a number of items that are nonnegotiable–for example, amount of usable square feet, geographic area, lease term, expansion option, parking facilities, and security. On the other hand, many items remain negotiable, such as rent rate, concessions, rent escalations, cash inducements, and amenities. The parties should understand from the outset that failure to obtain a non-negotiable term could kill the deal for the tenant. Other items may be “throwaways” that could be modified or omitted from the lease.

Example: A corporate tenant may lack the capital funds to improve the leased premises, and so may be willing to pay a higher rental rate or extend the lease term in exchange for a larger allowance for improvements. Alternatively, the tenant may be willing to fund all or part of the improvement costs in exchange for a lower rental.

Compromise In Negotiations

Although it is obvious that any negotiation process involves give and take by both sides, corporate real estate executives have learned the importance of understanding the strengths and weaknesses of their bargaining position as well as that of the landlord. Within reason, these tenants are assured of getting what is needed if the bargaining team is aware of the options and takes carefully calculated risks based on solid information.

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