How to Negotiate your Commercial Lease

In House

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For many independent specialty coffee and tea retailers, negotiating a good lease or lease renewal against an experienced agent or landlord can be a challenge. While a coffee or tea shop owner might typically spend time thinking about marketing, managing and menus, savvy real-estate agents and brokers are specialized salespeople. Their job is to bring in the highest possible rental rate for the properties they represent. Café tenants may go through the leasing process once or twice in their entire lifetime, yet they have to negotiate against seasoned professionals who negotiate leases every day.

Whether you’re negotiating a lease renewal or leasing a new location for the first time for your shop, these are some tips for tenants that we teach when speaking at Coffee Fest trade shows:

Negotiate to win.

All too frequently, tenants enter into lease negotiations unprepared and don’t even try to win. With big commissions at stake, you can be sure the landlord’s agent, on the other hand, is negotiating fiercely to win. Coffee/tea shop tenants should remember that it’s OK to negotiate assertively.

Be prepared to walk away.

Try to set aside your emotions and make objective decisions. Whoever most needs to make a lease deal will give up the most concessions, and a good business in a poor location is likely to become a poor business. Ask the right questions. Gathering information about what other tenants are paying for rent or what incentives they received will position you to get a better deal. Consider that your landlord and his agent know what every other tenant in the property is paying in rent, so you must do your homework too.

Brokers: friend or foe?

Agents and brokers typically work for the landlord who is paying their commission. It is not normally the agent’s role to get the coffee or tea shop tenant the best deal. Rather, it’s their job to get the landlord the highest rent, the biggest deposit, etc. Often, the higher the rent you pay, the more commission the agent earns. If you are researching multiple properties, try to deal directly with the listing agent for each property rather than letting one agent take you around or show you another agent’s listing. Your tenancy is more desirable to the listing agent if he can avoid commission-splitting with other agents.

Never accept the first offer.

Even if the first offer seems reasonable or you have no idea of what to negotiate for, never accept the leasing agent’s first offer. In the real-estate industry, most things are negotiable, and the landlord fully expects you to counter offer.

Ask for more than you want. If you want three months of free rent, ask for five months. No one ever gets more than they ask for. Be prepared for the landlord to counter-offer and negotiate with you as well. Don’t be afraid of hearing “no” from the landlord—counter offers are all part of the game.

Negotiate the deposit.

Large deposits are not legally required in a real-estate lease agreement. Deposits are negotiable and, more than anything else, they often serve to compensate the landlord for the real-estate commissions he will be paying out to the agent(s). If you are negotiating a lease renewal and your landlord is already holding a deposit of yours, negotiate to get that deposit back. The Lease Coaches are frequently successful with negotiating to have the tenant’s deposit returned.

Measure your space.

Coffee/tea shop tenants often pay for phantom space. Most of these tenants are paying their rent per square foot, but often they are not receiving as much space as the lease agreement says. Negotiate, negotiate. The leasing process is just that—a process, not an event. The more time you have to put the deal together and make counter offers, the better chance you have of getting what you really want. Too often, coffee and tea shop tenants mistakenly try to hammer out the deal in a two- or three-hour marathon session. It’s more productive to negotiate in stages over time.

Negotiating for free rent.

The most free rent we have ever negotiated for a tenant was the first four years free on a 10-year lease. In some cases, the landlord is in such a strong position that free rent is hard to get. The longer the space has been vacant, the stronger your negotiating position. If the agent won’t adjust or increase the free rent on the offer to lease, do it yourself (in pen) as a counter offer.

Select the best lease length.

While a five-year lease term is still standard (seven or 10 years in some cases), it is not necessarily the best term for your business. Three years, or even one year for some coffee and tea shop tenants, may be better if the cost of leasehold improvements is low enough, as these are generally amortized over the life of a lease term. The agent, motivated by a greater commission, may want you to sign the longest term possible, but the landlord may be flexible. Take the term that is best for you and your business.

Educate yourself and get help.

Unless you have money to throw away, it pays to educate yourself. Taking the time to read about the subject or listen in on a webinar will make a difference. And don’t forget to have your lease documents professionally reviewed before you sign them. With hundreds of thousands of dollars in rent at stake, as well as personal guarantees and other risks, you can’t afford to gamble. In leasing, coffee and tea shop tenants don’t get what they deserve. They get what they negotiate.

—Jeff Grandfield and Dale Willerton speak regularly at coffee trade shows. Visit them at the Lease Coach.