Sharpening your tools

After five years of substantial growth the northern Nevada commercial real estate market is finally seeing a slowdown. Buildings for sale and for lease are sitting on the market for longer periods of time. There are fewer tenants and buyers in the marketplace, and everyone seems to be holding their breath.

While this market may not be ideal for economic growth, a company can take advantage of the current market conditions to help their bottom line by negotiating a lease specific to their needs.

When leasing commercial space, as in any negotiation, the tools which tenants have available to them are limited only to their interest, flexibility, and creativity. Let's take a look at several of the more widespread negotiated points, which are commonly looked at and directly affect each party's bottom line.

Term - The length of the lease

If your business is just starting out, this could be a great time to get into a space. Owners of commercial property will typically look for a long-term lease, but in a market where tenants are scarce, landlords become more motivated. Owners are becoming more lenient in order to fill vacancies and will entertain short-term leases. A shorter-term lease will give your business some flexibility to adjust with demand and expand or contract as needed without a strong level of commitment.

On the other hand, a more established business that has the ability to sign a longer-term lease will continue to be a more valuable prospect. This type of business will have a lot more room to negotiate on other key points of interest like base rental rate, tenant improvements, and rent concessions.

Base rent

The most widely negotiated item within the lease is the base rent. This is a direct expense for the tenant and direct income for the owner. While this is a highly contended criteria on both sides of the coin, there are situations that can help tenants negotiate a better base rate.

Many times, a tenant will be looking for a longer-term lease, but is not able to spend a large amount of cash in the first couple of years going towards the rent. One strategy for a tenant in this situation is to negotiate a graduated rent. A graduated rent may start at a reduced rate and steadily increase over the term of the lease. Landlords will often accept graduated schedules, so that at the end of the lease term the rate is higher than the initial asked base rent. One thing a tenant should look out for here is the renewal option, or more specifically the price at which the lease will pick up after the original lease term.

Rent increases

Just as important as the base rent number is how it increases over time. One standard for annual rent adjustment is the Consumer Price Index, which models inflation and recently has been anywhere from 3 to 4 percent a year. A tenant should look to negotiate under this index or other indices that model inflation, in order to protect their future rate and lower their overall costs for the term of the lease.

Concessions

As more vacant space comes on the market, expect more concessions to incentivize tenants into a building. Concessions usually take the form of free or reduced rent. They may also take the form of a lower rent for a specific period of time, additional services, additional space, gifts, etc. Whether it is several months of free rent or the first year at a flat reduced rate, concessions are great tools for tenants to use to their advantage in order to lower their exposure and costs.

Options to expand

It is a good idea for a tenant to have a first right to expand their business to adjacent and or adjoining buildings and spaces.

Developers, who own business parks, centers and campuses, have frequent turnover within these facilities. While a tenant may be taking the only available unit today, tomorrow there may be an easy growth alternative to moving their business based on available space within their complex. This only happens to the tenant who is looking for this type of an opportunity before signing a lease.

Option to purchase

Depending on a business and its goals, an option to purchase a piece of property could be very beneficial to a tenant and their company. Books are written on the benefits of real estate investment. The important issue to address when negotiating a lease is that some owners will be interested in giving a tenant an option to purchase if they take the space. In many cases, these owners will look into carrying the debt on the property for the tenant. However, a tenant has to ask; otherwise opportunities can be missed.

Option to renew

A savvy tenant will realize the benefit in negotiating an option to renew their lease today, rather than at the end of the first term. First, the marketplace may change before the end of the lease term. Secondly, if the business does well at this location a property owner will be in a stronger position to negotiate at the end of the first term, because the owner would have to waste time and money in order to move into another location. Most importantly, you may be able to negotiate a price before signing a lease which will be well under market once the renewal is available.

The key to remember for any business over the next couple of years is that the marketplace is favorable to the tenant. If your business needs to shave some of its overhead, renegotiating a lease to your needs could help you achieve your goals. While we have highlighted a few points of negotiation for any lease, the list to choose from is a very long one and only limited to the vision and creativity of the parties involved within its negotiation.

Chris Fairchild, an associate at Industrial Properties of Nevada, specializes in tenant representation. Contact him at 324-3100 or chris@industrialproperties.com.

Commercial real estate professionals who would like to contribute to this column can contact John Seelmeyer at info@nnbw.biz.