Today’s Post-Pandemic Purchasing Environment Is Great for New Lease Negotiation
Specializes in providing actionable insights into the commercial real estate space for investors, brokers, lessors, and lessees. He covers quarterly market data reports, investment strategies, how-to guides, and top-down perspectives on market movements.
At the end of last year, we made a somewhat controversial decision to walk into 2022 confident and optimistic about the commercial real estate market. While we are aware that others would disagree about our findings, we still feel better about facing the new year and all of the potential opportunities with an open mind vs. a fearful one. That isn’t to say that we’re negating the effect of the pandemic, of course; we still want to acknowledge the reality that recovery is far from consistent across the board.
Yet, in all real estate markets, silver linings abound. This is the case for the fresh fiscal year, full of potential for investors of all sizes and across multiple asset classes.
We’re not the only ones remaining cautiously optimistic about 2022 being a great year for commercial real estate.
A Cooling Market Where the Lease Takes Center Stage
For a change of pace around here, let’s talk about commercial real estate for lease. Sure, we do write a lot about purchases, but picking up properties isn’t the only way to go. Indeed, if you have a great business idea but you need property to pull it off, the lease is one of the best ways to go.
Especially now, when so many property owners are looking at vacancies. In so many ways, the new lease agreement represents hope, opportunity, and a true win-win situation. Think about it from all sides: the owner gets a tenant that will handle the property with care, and you get a space in a great location.
It doesn’t just fall into place, of course: you will have to make sure that you’re willing to negotiate for a lease agreement that fits your best interests as well. Landlords are very motivated to make agreements that are a bit looser and full of incentives.
Local governments are also getting into the game because vacant properties signal all of the wrong messages to tourists and even people that are looking to relocate. Too many vacancies in an area make would-be residents nervous, and even tourists don’t like the feel of a place that has too many closed-down shops and boarded-up buildings.
The Triple-Net Lease: An Overlooked Vehicle for Power Moves?
There’s a different lease out there for every business owner, and one of the best structures to really take advantage of today’s marketplace is the triple-net lease. This may strike some investors as odd advice, as the definition of this lease means that the tenant is paying for a lot of expenses, not the landlord.
Here’s the secret: you’re going to pay these expenses one way or the other. Sure, with a gross lease, the owner is picking up the insurance, maintenance, repairs, etc. However, they are going to find a way to make that profitable in return.
The more the landlord has to pay, the less control you have as a tenant. Enter the triple net lease, where you do take on more responsibilities every month in terms of maintenance and repairs, but you also get more control over the space.
Renovating the space to suit the needs of your business type is very common, and landlords understand the need for this.
The lease concessions tend to be more favorable with the triple net lease structure, as you are agreeing to stay for a longer period of time.
Changing Your Mindset About Lease Agreements
Far too often, investors looking to become tenants instead of owners feel that they can’t negotiate much about a lease agreement. In other words, they just have to take whatever terms the landlord wants to offer in order to access a hot location. However, things in the marketplace are shifting.
The truth is that the pandemic era created a lot of vacancies. Long-term tenants suddenly could not get enough foot traffic to make money and therefore pay those rents. This downturn sparked a crisis within the industry, and landlords are making sure that they don’t turn down any deal that can lead to passive income.
The key here is to change your mindset about lease agreements. Here’s what that really means in practice:
- The willingness to define exactly what you’re looking for as a tenant.
- The drive to finalize an agreement, even if it means you don’t get everything you asked for.
- Bringing in a trusted expert that can review the lease agreement before anything becomes official.
- The confidence to trust that you will find the right space for your business needs.
The power is ultimately in your hands as a tenant. You are letting the landlord know that you’re willing to stay in one place in exchange for having more control and more concessions. The landlord, in turn, is getting someone with a strong history of performance that will take care of the property and make it look great within the community.
Incentives for Lease Agreements
One of the questions received most often is whether or not there are specific local, state, or federal incentives for business owners to sign new lease agreements. From our research, we did not see any direct programs featuring money for lease agreements. However, that doesn’t mean that you should avoid speaking with the local Chamber of Commerce and your area’s business development team.
Remember that leases are just another operational expense of the business. This means that if you’re seeking funding for a business idea, asking for the lease costs is possible through a business loan or even if you’re applying for grants. If you do decide to go for business grants, be very clear about your purpose for the business and your vision for the space.
Stay Flexible in Your Lease Agreements
Although we featured triple net leases in this guide, there are so many different ways to set up a lease agreement between you and a future landlord. The same is the case if you decide to become a landlord in the future. Tenants want to get a great deal, and landlords want to have an ongoing source of income that they don’t have a ton of overhead from.
Remembering this concept will help you at the negotiation table and beyond. Building win-win relationships in your real estate business life leads to so many benefits and new connections. After all, treating a landlord well as a tenant could lead them to recommend other properties you may want to purchase in the future, including the space you’re leasing.
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