Lease Negotiation

While there is no end to the number of variables or issues open for discussion during the negotiation period, these are some of the more important ones:

  • Lease rate
  • Rental abatements
  • Tenant improvement dollars
  • Caps on expenses
  • Protection for operating costs for tenants
  • Tenant rights of assignments and subleases
  • Limitation of liabilities, indemnification and holdover issues

Financial analysis is paramount in any negotiation of corporate real estate. While it may be hard to pinpoint the absolute most important service we provide to our clients, financial counsel is among the top ones. Signing a lease is a crucial business decision and must be done only when all the pertinent financial information and options have been reviewed.

Flatrock clients are armed with a complete and comprehensive financial plan so an informed decision can be made. The specific type of analysis needed varies from client to client, but some basic options are present and include the following:

  • Value of lease costs
  • Lease vs purchase analysis
  • Construction estimates for improvements
  • Net present value calculations

Current market trends, economic conditions, political considerations and legal changes are also factored into the analysis.

The Most Common Pitfalls and Ways to Avoid Them

  1. Being too rigid about your preferred location
    If you’re only looking at buildings with similar rent to what you’re paying now–and prospective landlords know that–you’ve completely demotivated them to give you a better deal. On the flip side, if they learn that you’re touring less expensive spaces, then they may ease up on business terms.
    Best practice: Try to be flexible in this stage. Open yourself up to less expensive markets you might not normally consider. And don’t just say you are—actually tour a few. Doing so will give you more negotiating leverage in your preferred market.

  2. Not thoroughly inspecting a building
    Many tenants overlook one of the biggest liabilities in a new lease: the base building systems and condition of the premises, i.e. the physical condition and safety of the building. Poor infrastructure is an obvious red flag, but building enhancements can be just as concerning. When a landlord makes a significant improvement to their building (such as adding a new roof or replacing the HVAC), those associated costs are often billed back to tenants over the duration of the lease.
    Best practice: A proper inspection and lease protection can prevent a large liability from a capital improvement project.

  3. Putting all your eggs in one basket
    Real estate is often an emotional decision. When viewing locations, you may find yourself saying “this space is perfect; we have to have it.” But too many companies put all their effort into a single building, and for one reason or another it falls through. They’re then forced to go back out to market and start from the beginning.
    Best practice: Always have a suitable backup. Even when you believe you’ve found the perfect spot; you shouldn’t stop searching. Finding a suitable alternative is critical.