Negotiating Lease Concessions When Renting Commercial Property
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Within commercial real estate, lease concessions are discounts or adjustments to commercial leases that landlords provide to tenants, and a key aspect of negotiating a commercial lease is securing favorable lease concessions.
Lease concessions could include:
- Reduced rent;
- Limited free rent;
- No deposit fees;
- Moving assistance; and,
- Building amenities.
Tenants negotiate lease concessions to get a better deal when buying or renting property, and landlords offer concessions to entice renters. Here, we'll dive into how to negotiate favorable lease concessions when renting commercial property.
Let's get started.
Key Lease Concessions You Should Consider When Renting Commercial Real Estate
The exact lease concessions you will get will depend on the landlord you're negotiating with and your specific lease contract. However, we recommend that every commercial tenant consider asking about the following lease concessions during negotiations.
#1 – Rent Abatement
Rent abatement is a period of either free or reduced rent, typically within the first few months of the lease. The purpose of rent abatement is to allow the tenant time to move in, get organized, and start generating revenue before having to make rental payments.
To make up for the free or low-rent period, landlords might charge more in subsequent months. Either way, the increased financial flexibility rent abatement provides is a net benefit to commercial tenants.
#2 – Tenant Improvement Allowance
A tenant improvement allowance is essentially a fund the landlord provides the tenant to make small cosmetic repairs and changes to their space, like installing new carpeting or changing the floorplan layout. A tenant improvement fund can be a single lump sum or based on the total square footage of the lease.
Typical tenant allowances vary between $10 and $45 per square foot, depending on the city and property submarket. For example, the average NYC tenant improvement is $48.00 per square foot, and the average Denver tenant improvement allowance is $19 per square foot. Tenants are responsible for any modification costs that exceed these allowances.
#3 – Security Deposit Reduction
Another concession you could ask for is a reduced or waived security deposit. Landlords might be more willing to lower security deposit fees instead of providing free rent because it won't cut into their immediate revenue.
However, the downside to this for landlords is that they won't have funds to pay for damages or cover missed rent if they don't charge a security deposit.
#4 – Moving Assistance
One of the biggest headaches that comes with renting a commercial property is simply moving in. You can ask the landlord for moving assistance to remove some of this financial burden.
Moving assistance can cover things like moving trucks, crews, and other associated fees. Moving assistance could also include buying basic building necessities, such as toilet paper, paper towels, or basic cleaning supplies.
#5 – Building & Local Amenities
Lastly, landlords can also offer building amenities, such as garage parking, free WiFi, or local gym memberships for tenants. This option is less common than other types of lease concessions and depends on whether the building has any amenities in the first place.
It can be worth asking about additional accommodations if the property is near local amenities, like restaurants, gyms, etc.
How Do You Negotiate a Lower Price on a Commercial Property?
Below are some tips on how you can effectively negotiate a more favorable price on your commercial lease.
- Use a broker. Real estate agents and brokers are experienced at negotiating a lease and can use their expertise to get deals tenants might not think about.
- Offer lower than the asking price. The rental asking price is the maximum amount the landlord is looking for, and they are often willing to accept less if you negotiate properly.
- Get a longer lease term. Generally, if you sign for a longer lease term, you can get lower monthly base rent. You can also ask for lower rental increases upon annual lease renewals.
- Consider a profit-sharing plan. You can also offer a portion of profits to reduce your base rent. Profit sharing plans are a method used by tenants to offset the cost of rent by splitting profits from business activity with the landlord. Typical profit-sharing plans start with a base rent plus a percentage of any profits generated over a specific threshold.
The good thing about commercial leases is that their structure is highly flexible compared to residential leases, so you should be able to more easily tailor agreements to meet your specific needs as a commercial tenant.
What Is the Most Important Consideration in a Commercial Lease?
The single most important consideration of a commercial lease is rent structure. A lease's rent structure defines which specific rental costs tenants are responsible for.
Most commercial leases fall into one of the following five types:
- Single Net. Tenant pays rent/utilities and property taxes, landlord pays maintenance and insurance.
- Double Net. Tenant pays rent/utilities, property taxes, and insurance, landlord pays maintenance.
- Triple Net (NNN). Tenant pays rent/utilities, insurance, property taxes, and maintenance, landlords only cover basic building repairs.
- Full Service. Tenant pays rent/utilities, landlord pays for property taxes, insurance, and maintenance.
- Modified Gross. Tenant pays rent/utilities, landlord and tenant each pay for portion of operating costs.
There are also absolute net leases in which the tenant is responsible for all building costs, though these types of leases are uncommon.
Rent structure determines how much you'll have to pay each month, so it's usually the very first thing you should negotiate. Once agreeing to a rent structure, you can negotiate for further lease concessions.
What Is an Escalation Clause in a Commercial Lease?
Virtually every modern commercial lease has what is known as an escalation clause. An escalation clause is a provision in the lease agreement that allows the landlord to increase rent according to a timeline or when specific conditions are met.
For example, an escalation clause might specify that rent increases after every three years. Typically, rental hikes from escalation clauses come in three flavors:
- Fixed price increase (e.g., rent increases by $1.00 for every square foot);
- Percentage increase (e.g., rent increases by 2% annually); or
- Inflation-based increase (e.g., rent increases according to inflation or consumer price index (CPI)).
Generally speaking, fixed price increases in escalation clauses are desirable because they tell you exactly how much rent will go up if you renew. It's generally best practice to avoid inflation-based escalations because inflation can be unpredictable and saddle you with high rental hikes.
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