Startups don’t always have the most clout when trying to negotiate a commercial real estate rental with landlords. But it is not impossible for a startup to end up with good terms for their first commercial lease, particularly with real estate markets reviving in some parts of the country. Here are a few tips for negotiating for a favorable lease, as suggested in the article “How Startups Negotiate Favorable Leases”:
#1 Work With a Broker Small businesses—especially startups—can benefit hugely from working with a lawyer who is familiar with the industry and the area. Talk to other tenants in the building about the brokers they used, and try for someone who has experience with that building, or even just with the neighborhood. Commercial markets can be very specialized, so it is important to not only have representation, but to have representation that knows the context. Be particularly wary of seeking help from the landlord’s broker, who will be prioritizing the interests of the landlord.
#2 Evaluate the Location Consider the positives and negatives of a location. Remember that while a flashy location might be important for some types of businesses, that kind off luxury will also come with higher business license fees and taxes. Also consider things like parking for clients and building access for deliveries.
#3 Know What is Included in Your Rent Depending on the type of lease, your rent might not include everything–for example, you might have to pay separately for utilities, janitorial services parking, property taxes, maintenance of common areas, or insurance. All leases vary and are negotiable, so try to make sure that the terms in your lease match the particular needs and budget of your business.
#4 Ask for Concessions from Your Landlord Because the real estate market has been in such a slump, landlords have been offering a lot of great deals to tenants. But as markets in many areas start to improve again, these deals may get less and less frequent. Usually sweeteners are offered to long term tenants, so if it is possible, try to get a good deal on a long term lease while you can—but know that shorter leases are generally better for smaller companies because there is less financial risk involved.
#5 Include a Termination Agreement Give yourself an escape hatch both for the possibility that your business is hugely successful or struggling. Whether you have outgrown your space or you are having difficulty paying rent each month, a termination agreement can facilitate a much needed way out. Some landlords will want to be able to approve of a transfer of ownership of your business or ask for a personal guarantee, especially if you are a startup. Make sure that these terms are clear and try to negotiate to make them as favorable as possible. Best case scenario, you do not need a landlord’s permission to transfer a lease, which will allow you to make a deal if need be without worrying about pleasing your landlord.
#6 Try to Get a Cap Fees that increase annually can become a major burden for businesses in long term leases. Try to negotiate for a cap on management and operating fees based on a percentage of your rent. Caps like these can be difficult to get, especially in thriving markets, but they are still worth trying for.
While startups are not in the best position to negotiate great leases, it is still possible to come out with something favorable for your business with a little negotiation smarts.