Four commercial leases in 17 years. Technically five, but the first one was a disaster in the making and ended before it began. Still, four is more negotiating than I ever expected to experience, and the subsequent period of dealing with the terms we agreed on has provided a steep education in this essential element of business ownership. Here’s some of what I’ve learned:
Landlords are not villains.
Most of them are small business owners, too. They have mortgages, tax bills and a giant building that needs a new roof. Not to mention all of the liability that comes with it. I have had two incredibly dear landlords who I still keep up with today. But a lease is written by their attorney to their benefit, and your job is to make it work for you, too. The good news is that nearly everything is negotiable. The bad news is it takes either guidance or practice to get it right.
Start with the LOI.
The letter of intent is where the real negotiating happens. It’s only a page or two and isn’t binding, but it covers the big terms, including rent rates, allowances and major repair responsibilities. This makes up the nuts and bolts of your lease agreement, ideally providing terms that are neutral-to-favorable for you.
Once you’re into the lease itself, you’re sifting through forty pages of confusing legalese where every edit costs you expensive attorney time and goodwill with the landlord. If you can get the big picture settled in the LOI phase, the lease is much, much easier.
Hire a broker. It probably won’t cost you a dime.
Many business owners skip hiring a tenant’s broker because they assume it’s expensive. But it’s the landlord who usually pays the commission. And you simply cannot beat the market knowledge a broker brings to the negotiation. They often know the landlord and building of interest and have negotiated on it previously, providing you with immeasurable insight on terms. Plus, they’re a buffer for you so you can stay pleasant with the person you’ll be paying rent to for the next five or ten years.
A good attorney will cost way more than a dime, but it’s worth it.
Like the broker, your attorney has likely redlined a lease for this landlord or building. They know the quirks and terms already written into the lease and the negotiations the landlord is likely to agree to. And there is still plenty to negotiate in this phase. For example, if you’re planning a potential sale of your business, your attorney can help negotiate terms for a reassignment of your lease. This is just one of many examples of what’s possible with an attorney working on your behalf. To be sure, your landlord will have their own attorney redlining the lease in their favor.
HVAC: ask for the world.
Heating and air is among the most expensive repair a business owner can have. If you’re already a homeowner, you know what I’m talking about. It’s somewhere in the low five figures to replace a unit, not to mention the hundreds of dollars worth of repairs before realizing it just needs to be replaced.
Your LOI is the phase for this negotiation, and the details of it will be refined in the lease. Open by asking the landlord to cover all repairs and replacement for the full term, along with any lease extensions. They will almost never agree, but ask anyway. On my current lease, I ended up with the landlord covering the system for year one and me covering it after that. Prior to that, I negotiated a super favorable situation where the landlord covered everything over $350. And that was the unit that failed and needed replacement! Starting high is how you get to the middle.
Tenant improvement allowance: the fun (albeit expensive) part.
Always ask for TIA. This is an allowance that funds your studio vision. Fresh paint, new floors and lighting, a fancy sign. Whatever they cover, they’ll own at lease-end, but you’ll enjoy the hell out of it in the meantime. I’ve negotiated upwards of $10 per square foot, and that’s a reasonable place to start. Longer terms and spaces that need a change-of-use or major demo will justify more. Just note that it’s usually paid out after all construction is complete, so you’re on the hook for the build-out expenses until then. Reimbursement is released once all lien waivers are signed by the contractors. So plan your cash flow accordingly.
Rent abatement: 90 days, separate from TIA.
Typically, we’re still paying rent and running our business in space A while negotiating for space B. So rent expenses are ongoing. Plus, if you have a refresh or build-out planned, your contractors will need to start work weeks or months before you move in. This is where rent abatement is a dream necessity. Ask for 90 days before rent starts, regardless of how much TIA you get. These are two separate asks. No business owner wants to pay double rent while you paint, install lights and argue with the city over permits. It’s a standard ask and essential for cash flow.
Negotiate base rent and NNN rates.
Most major cities have base + triple-net lease structures. This means you’ll pay a base rent cost per square foot in addition to a NNN cost per square foot. Triple net is your share of the building’s taxes, insurance and common area maintenance (CAM). Building class, neighborhood and visibility are variables in your cost per square foot for base rent. But there’s usually some wiggle room here. Always negotiate a lower number on base. Triple-net is different. This rate is passed down by the landlord based on estimates from the previous year. So it’s often not as negotiable. But you can influence this, too…
Cap annual increases on base rent and NNN.
Each year, your base rent and NNN costs go up, but you can negotiate the percentage increase. For base rent, I’ve signed at 2.5% and negotiated as low as 2%. Triple-net requires a bit more effort:
Confirm your pro rata share. Get the building’s total square footage and your square footage, and do the math yourself. One of my coaching clients made this simple calculation and found her share was written into the lease incorrectly. So she brought the revision to the landlord, he agreed and the lease was updated prior to execution.
Negotiate a cap on annual increases. Ask for a non-cumulative cap of around 3%. Then read what the cap actually covers. Landlords often exclude taxes and insurance, capping only the costs they control. But every penny matters here.
Parking: get it in writing.
Make sure the parking set aside for your customers stays that way. Buildings change hands, and a new owner can see your studio’s parking lot as a revenue stream. I learned this the hard way. Since then, my LOIs include a line item around parking. Negotiate reserved parking specific to your business in addition to unrestricted access to common area parking. You may not get the reserved spots but unrestricted access is essential.
Don’t forget about the extras including use, security deposits and personal guaranty.
Exclusive use restricts the landlord from leasing the unit next door to a comparable business. In my case, I ask for exclusivity for Pilates, the Gyrotonic method, dance conditioning and strength training. This has saved me twice. You don’t want a competitor moving in next door. Of course, they’ll just move in across the street (true story), but control what you can control.
Define permitted use by describing everything you do, including workshops and professional education courses. Have the landlord confirm zoning allows it and agree to cooperate if the city requires a change of use. All to say, it’s wise to do your own homework as the city will have the final word on whether or not you can operate, and your landlord will require his rent either way.
A personal guaranty is very common. This means you’re personally liable for the rent if your business closes or defaults. (If there’s any question you can afford the lease, take a beat before signing as this is as binding as it gets.) Even still, try to limit it by negotiating an expiration of the personal guaranty after two or three years of on-time rent. I’ve had it go it every which way, and some landlords simply won’t budge on a full-term guaranty.
Negotiate renewal options with caps on base and NNN. A renewal based on your existing increases is pure gold. You don’t have to exercise it, but it’s worth outlining now as it’s a major factor should you ever wish to sell your business. A renewal at “fair market value” is a coin toss, and if you’re in a city like Austin where FMV is nearly double what it was 5 years ago, you’ll be looking and negotiating all over again at lease-end.
More on selling your business: if you have grand designs to do so, alert your attorney to adjust the assignment and subletting language. Your buyer has to be able to take over the lease, ideally without your personal guaranty still attached. If your lease doesn’t allow it, your exit plan just got very complicated. Ask me how I know.
The bottom line: you have more leverage than you think.
Landlords are just like us. They’re seeking drama-free stability and goodwill. They want quiet tenants who pay on time for years, and that’s exactly what a well-run studio does. When negotiating your lease, ask for more than you expect. Let your broker carry the hard conversations. Read every line before you sign. If you don’t understand the legalese, ask your attorney (keep it brief, s/he’s expensive!) Empower yourself with generous terms that set you up for success.
-Amanda