Next to payroll, rent is one of the largest expenses a small business owner has to contend with and, depending on your market, it can increase dramatically year-over-year–even if your revenues don’t. Office rents in Seattle, where Gravity is headquartered, are rising two and a half times faster than the national average, which is bad news in a market that’s already quite expensive. And of course, rents in other big cities, such as San Francisco, Los Angeles, Washington DC, and New York, already well surpass the going national rate.
If you work in one of these markets, renewing your lease or searching for a new space can provoke all types of anxiety. Luckily, while there’s not much to be done about average rent prices, there are a few things you can do to increase your chances of negotiating a more favorable lease extension. Having moved into a new office space last year, we at Gravity would like to share some of the best practices we learned along the way.
Give yourself multiple options
If you’re just trying to negotiate with your current landlord, you won’t have much leverage. Seek out a few places in order to generate competing offers. Similarly, if you need more or less space or would prefer to move to a different location, consider relocating to fit your needs. That being said, you need to factor in more than just rent when considering the cost of a move. “You must compare the renewal terms to the total cost of relocation, including build-out and moving costs,” says Kris Richey Curtis, a partner at Kinzer Partners. “But in some cases a new landlord may be more aggressive in attracting you than your current landlord is in trying to keep you. “Take advantage of an upcoming lease expiration. It’s an opportunity to consider new options that may provide better terms, a better location, or a chance to redesign your build out.”
Be proactive and aggressive
Instead of waiting for your landlord to send you a term sheet, send one to him or her instead. This will require research to find out about market rates and what you want, but doing this extra bit of homework will anchor the landlord to a set of terms of your choosing. Studies show that presenting a well-informed first offer often leads to a better financial outcome for the one making that offer.
When presenting your proposal, it’s always better to ask for more than what you’re willing to settle for so you have room to move. When you send your proposal, ask for terms that are more favorable than where you are likely to end up. Oftentimes the person making the offer is hesitant to ask for more than they’re willing to take, but don’t be afraid to get aggressive.
Know the landlord’s position
What is most important to your landlord? According to Curtis, they may want or need a high rental rate because they’re looking to refinance or sell. If that’s the case, she says, “Seek more free rent or tenant improvement money. If the landlord has cash problems, you’ll have less success asking for out-of-pocket concessions like tenant-improvement money. You’re better off trying to drive down the price you pay per square foot (aka the rental rate). At the same time, try to understand what is happening with other tenants. Is the landlord at risk of losing other tenants? Can you get recent comps for other leases completed in the building?” When you negotiate from an informed position, you increase your chances for success.
Lay out lots of terms
Rent is just one factor that goes into a lease. When submitting your proposal, you should also present your requests for term length, early termination options, late rent charges, and parking space costs. Regarding term length, the longer the lease, the longer you can lock in your terms, but doing so also adds risk since you don’t know what the future holds. Landlords generally prefer longer term lengths, so by lengthening the term length, you might be able to get a reduction in rent. Similarly, you should also consider holdover terms in your proposal. Holdover is the situation in which the lease has ended but the tenant stays in the space with or without the consent of the landlord. Generally, the lease will outline rent and other terms that would apply in a holdover situation.
Understand what the landlord is offering new clients
Sometimes landlords will help finance the build out of an office for a new tenant and provide other concessions to attract them to the space. If you’re negotiating with your current landlord, figure out how much they’d likely have to pay to replace you and factor that into your negotiation terms. According to Curtis, renewing a tenant is generally cheaper than releasing space, so you should point out the value you bring to the building by staying, such as good credit and a history of paying rent on time. If you’re a retailer, you can also cite the positive brand/energy you bring to the street level and the fact that you provide an amenity for other tenants. “Even if the landlord can get a higher rent from a new tenant, there is a high cost associated with releasing,” Curtis says. “The landlord will inevitably have downtime (a period between you moving out and a new tenant moving in), leasing commissions, and risk related to the viability of the next tenant.”
Hire a broker
If you have a sophisticated landlord who is represented by a leasing agent, hire a broker. The landlord should pay your broker (aka tenant rep) fee, though some mom-and-pop landlords will not pay this, in which case you should decide if that is a cost you want to bear. A broker will have the market insight needed to create leverage and negotiate the best possible terms.
Gravity Payments exists to stand with the little gal or guy who believes in the American Dream and is willing to work to chase it. Contact us today to see how we can help your business thrive.