You’ve found a few good spaces you like; now the objective is to obtain the best deal possible. Ideally, more than one of these spaces is exciting for you so that you can hedge them against each other to maximize your negotiating leverage. If there’s only one that floats your boat, keep your head on the swivel throughout the process – new spaces surface every day. The more options you have, the more leverage you maintain.
Negotiate your office space lease
Use a formula
When approaching the negotiating table, the typical tenant who’s doing this for the first time is most focused on getting the monthly rent as low as possible. This is the most common mistake tenants make when a broker is not representing them. The proper way to analyze a deal is to look at its total value. That’s the way landlords assess deals, and that’s what you should do too.
The most basic way of doing this is to take the annual rent (remember, this increases each year by fixed escalations and taxes) multiplied by the lease term, minus the free rent, minus tenant improvement capital that the landlord is giving you to improve the space.
annual rent + annual increases + taxes = annual cost annual cost * lease length = adjusted total cost adjusted total cost - free rent - tenant improvement capital = real total cost
There’s more to the deal than monthly rent
There’s always the one guy on the floor who brags that he’s paying the lowest rent; that’s the schmuck who let the landlord pull the wool over his eyes into thinking that low rent automatically makes a good deal. There’s a lot more to it than that.
Each of the factors that make up the overall deal affect each other – which is the key to getting your company the best deal that suits you. Forget about the monthly rent for a second and have a brainstorming session with the decision-makers of your company about what’s important for you.
Perhaps you’re a growing company that needs as much cash as possible for the first few years, but expects revenues to multiply exponentially down the line. Propose super-cheap rent for start of the term, then backload it so that the landlord can recoup some of that rent towards the end of the term.
Maybe esthetics is the driving factor and you want the nicest space on the block. Think about paying another $1/foot in the rent, and get the landlord to give you value of that up-front so that you don’t have to come out-of-pocket for your high-end build out.
Did you just get funded and have cash in the bank? Ask the landlord to give you more free rent than he would have by spreading it over the lease term. It’s always sweet to be 3 years into a lease and have a few months free rent still coming up.
Your approach should be one that’s focused on your specific needs. At the start of negotiations, the landlord usually knows exactly what the total deal value is because that’s what he’s trying to achieve. Don’t sell yourself short by not structuring the deal optimally for your situation.
Getting as low as possible
How do you know how far to push on an initial proposal without turning the landlord off? How do you know when to stop negotiating and take the deal on the table?
Commercial real estate, unlike residential, is not so transparent. Everyone knows, within a hundred bucks or so, what your friends’ apartment rents for. Office space is different.
Brokers can usually send you a list of recent deals in or around a building that you’re interested in. If you have that information, it’s a good starting point. The more you know about recent, similar deals to yours, the better equipped you are to achieve a favorable deal. Information is the key to getting a landlord to come down.
And don’t forget that charm… landlords are people too. And if they like you, you’re off to a good start.
Founder of Skylight Leasing, a New York City-based commercial real estate brokerage firm with a focus on tenant representation.