Understanding the Process: Tips for Negotiating Commercial Leases for Startups
In the process of starting and growing a new business, there are a lot of hurdles than entrepreneurs have to face. One of those hurdles is the cost – starting a business is expensive, and leasing office space is one of the biggest expenses a young company will incur. Therefore, it’s extremely important to know how to negotiate for the best possible lease. This can save you money that can then be redistributed into other parts of your company. Every lease is different, but the following tips will help you learn what to look for and how to make sure you get a lease that meets the needs of you and your company.
Of course, you’ll need to note that your ability to negotiate a lease depends on how much leverage you have, so scout around. Find out if there are other companies that are interested in the space you’re looking at, and how long it’s been vacant. This will let you know how much leeway you may or may not have when it comes to negotiating the exact terms of the lease. So, some other things to think about:
The Lease’s Length
Finding a new tenant can take a lot of work, so landlords are often willing to work with you on lease terms if, in return, you’re willing to commit to a longer lease. On the other hand, if your needs change, you may end up stuck in a lease that’s too small, too big, or too expensive. If you can, sometimes a compromise is the best option – look for a shorter-term lease with the option to renew, and you may be able to get the best of both worlds.
Rent Escalations
A steady rate for rent is relatively uncommon over a long period of time. This makes sense – housing markets get more expensive, and there’s always inflation, so landlords have to raise the rent over time. Sometimes, this takes the form of annual, percentage-based increases connected to the Consumer Price Index (CPI). This is often negotiable, to some extent. You can try to make a deal for a rent increase that doesn’t kick in until after the first two years (at least), or try to negotiate for a cap on how much the rent can increase per year. You can also negotiate ahead of time for a fixed increase, rather than one based on the CPI.
Improvements
Many leases state that the tenant may not make unapproved alterations or improvements to the property. But, the space may need some improvements in order to fit your needs, so ask for a clause that will allow you to 1) make those improvements with the landlord’s consent, and 2) provides that the landlord cannot unreasonably withhold or delay that consent. Since improvements raise the value of the property, your landlord may be willing to give you a tenant improvement allowance, a pre-negotiated amount of money that the landlord will provide you to make the improvements you want.
Repairs and Replacements
Many leases contain a clause that states that at the end of the lease, the premises must be in the same condition that they were in at the beginning of the lease. Try to negotiate for a clause that will exclude ordinary wear and tear, fire damage and damage that wasn’t the tenant’s fault, and (of course) any landlord-approved alterations or improvements.
Assignment and Subletting
As a growing company, you need to prepare for possible mergers, changes to share ownership, and other types of reorganization. Make sure you negotiate for an Assignment and Subletting clause that is flexible enough to accommodate these possible changes.
Shop Around
Be aware that the terms “usable square footage” and “rentable square footage” are not the same, and they are not interchangeable. Remember that a space’s useable square footage is always less than the rentable square footage. This is because “usable square footage” excludes common areas – for example, hallways, elevators, bathrooms, and lobbies – so don’t compare two spaces that have different units listed; make sure you’re comparing apples with other apples, and nothing else.
Think About Subleasing
Sometimes companies grow and take up more space over time. Other times, they shrink, and some older companies end up with a large space that outsizes their needs. You may be able to find a good deal subleasing office space from a company like this. Subleasing also comes with a handful of potential advantages over a direct lease: The space is already in use, so any needed improvements are probably already in place, t may be cheaper and easier to get than your own dedicated facility, and you can probably get a shorter lease term (so you won’t be trapped if it doesn’t work out).
Of course, in addition to the other company, you’ll also be beholden to the terms of the original lease with the landlord, so don’t skim that document.
Letter of Intent
It may be helpful to begin your negotiations for your space by presenting the landlord with a letter of intent. This is a good way to start out the negotiations with your essential terms already on the table: lease rate, term, renewal options, improvement options, et cetera. After laying the groundwork with the letter of intent, you can negotiate for a lease that both parties will find satisfactory.
