state or city. This tax is much like a sales tax—the government charges a percentage of the rent a landlord collects. The landlord passes that charge directly through to you. The rental rate tax varies widely from place to place. Ask your landlord how much it is in your area so you can fit it into your financial projections.
Triple net is the other expense you must pay with your rent each month. In some places, triple net is called “net, net, net.” In others, it is called “common area expenses” or “common area maintenance,” “CAM” for short. Triple net includes three expenses. The first expense is maintenance. This maintenance includes your share of the cost of managing the complex and of maintaining the parking lot, roof, signs, elevators, landscaping, and other shared resources. The second expense of triple net is your share of real estate taxes. The third is your share of any insurance your landlord keeps on the property.
Triple net is typically expressed in price per square foot just as rent is. Your landlord charges it annually but impounds it monthly. At the beginning of the year, your landlord makes an estimate of annual expenses. They divide that amount between the merchants in the complex (usually based on percentage of square footage). Then they divide your share by twelve so they can bill you monthly. At the end of the year, they check the actual triple net costs against the projections and either bill you for the balance due or refund the amount you overpaid.
Besides rent, taxes, and triple net, the terms of your lease may require you to take out your own property and fire insurance. Although you pay the cost of that insurance to the insurance company, it is still as much a cost of renting the space as rent is. Check additional insurance requirements as a part of your investigation into what the space will cost you.
Compare your rent with other comparable properties in the area. A real estate agent can help. Make sure what you will be paying is comparable to other similar spaces. Differences in price may reflect some crucial differences between complexes. Larger spaces and spaces with longer leases usually have lower square-foot prices. Older buildings and buildings in bad neighborhoods usually have lower overall prices. But some complexes are just a good deal. Either way, comparing prices helps you determine whether a space is worth what you are going to pay for it.
Negotiate a Lease You Can Live With
Once you’ve picked out a space, it’s time to get the lease nailed down. Unlike many apartment leases, commercial leases typically have some “wiggle room.” In other words, a certain amount of negotiation over rent, improvement to the space, payment schedules, and other provisions is not only possible, it’s expected. In fact, most commercial lease contracts are initially biased toward the landlord. It’s your job to protect your interests—not to make the contract biased toward you, but to bring it back to center, where it is fair to both parties.
What do you do if you want to lease a commercial space and you aren’t a very good negotiator? First, make yourself comfortable with the issues involved in your lease. Read as much as you can about commercial leases. Talk to commercial real estate agents and brokers while you’re looking at sites to learn as much as you can from them. Once you have the lease in hand, take it to a real estate attorney. She can look over the contract for you to make sure it protects your interests. Then read the lease yourself. Make sure you understand everything—every word, every provision—in the contract. Know what you are getting into before you begin negotiating.
If you still aren’t comfortable with the actual process of negotiation, you can get help. Commercial real estate agents are used to negotiating contracts. But remember, your real estate agent gets a percentage of the rent they negotiate. Their commission is paid by the landlord. During the negotiation process, real estate agents are generally very professional, but they do walk the fine line between keeping you happy and keeping their commission high. If you’re uncomfortable using your real estate agent as a go-between in the negotiation, you may be able to get a friend with real estate or negotiation experience to help you. Or you may want to hire your accountant, a broker, or a real estate attorney to represent your interests. They cost money, of course. But if they know the business, they can often get you a better lease than you could get yourself. However, once you’ve signed the contract and paid any outside consultants you’ve hired, you are on your own. Your representative doesn’t live with the results of the negotiation; you do. It is your responsibility to weigh all your options and then to live with your choices.
Basic Negotiation Principles
When negotiating a contract remember two things. First, in the world of contracts, if it isn’t on paper, it isn’t “real.” Your landlord is not legally bound by anything they say, only by what they write down and sign. Second, you are not negotiating only with the person across the table. Your landlord may be a very pleasant person, a person of their word, a person you can trust. But you are not only making the contract with them. You must assume that the contract will be referred to and used by others: by the landlord’s business partners, his attorney, anyone the landlord might sell the property to, the courts that may have to be involved should there be a dispute or bankruptcy. The contract must be able to exist as a stand-alone document, a document that protects your rights no matter what should happen or who should get involved later.
Tradeoffs and compromises are the name of the game in contract negotiations. Think about what you bring to the table before you sit down. One bargaining chip you have is the business you will bring to the center. Think about what your landlord wants. They want stable, professional tenants who can fulfill the terms of their contract and pay their rent on time. They want tenants who fit in with the image of their shopping center. They want steady business that will make their center thrive. If you can prove you provide these things, it puts you in a good negotiating position.
Another bargaining chip you may bring to the table is a willingness to make improvements to your space yourself. The landlord will expect to make certain improvements to the space before you move in. If you are willing to move into the space as is, to make the TIs (“tenant improvements”) yourself, you can trade the cost of the improvements for rent-free time or a reduction in your monthly rent. Conversely, if you don’t have a contractor’s resources, if you want the landlord to help you make the space ready to do business, you may have to begin paying full rent immediately. Or you and your landlord may be able to find some specific middle ground.
The art involved in playing the tradeoff game is that the landlord typically won’t tell you up front how much he has budgeted to make improvements. Negotiation becomes a little like playing poker without knowing how many chips you have in front of you. Go ahead and guess a little (but not outrageously) high. Your landlord will have no problem telling you if you are unrealistic.
A general principle: bargain in good faith. Don’t ask for the moon. Don’t ask for a lot of things you don’t want, expecting to use them later as bargaining chips. Go ahead and ask for everything you want. But expect to make concessions to keep the deal fair for both you and your landlord. Be reasonable, but don’t settle for anything less than what you need.
Remember, your goal is to negotiate the best deal you can with your landlord. It is not to beat the landlord into the ground. This is negotiation, a controlled sparring match, not war. Your goal is to establish a fair, equitable long-term relationship between you and the person who owns the building you will be working in for several years to come. Be good to your landlord. Be assertive, but treat the landlord fairly during negotiations. Then, after you move in, be the landlord’s eyes and ears on site. Watch out for the landlord’s interests, and he may do the same for you.
Plateau-Level Bargaining
