The supply/demand equation heavily favors the landlord in the current market. Landlords have the upper hand—or so they think!
We are going to take a look at proven methodologies for rent control: actions you can take to negotiate the lowest rent possible. Different industries may require different strategies, depending on specific needs, but the following 5 best practices can be applied across the board.
Time is Your Greatest Advocate: Use it
Time can be your greatest asset or your worst enemy, during lease negotiation. The earlier you engage your landlord, the more leverage you will retain because you dictate the pace of negotiations. The later you engage, the less leverage you retain and the less likelihood you have for securing the lowest costs.
Many tenants do not take advantage of this because until they have certainty in their business needs they are not willing to make decisions or commit to facilities. These needs are often influenced by things such as customer contracts, M&A activity and labor or union contracts, which are often not aligned with a lease expiration.
Many tenants do not realize that starting a negotiation does not mean you have made a commitment. In fact, you are not obligated to do anything. By beginning the process early you have the ability to negotiate on your terms; you dictate the pace, not your landlord.
Find the Point of Capitulation
Negotiating lease terms can be an anxiety provoking process. Knowing when you’ve won is difficult and nobody likes feeling that they could have gotten a better deal.
Enter, the point of capitulation. The point of capitulation is the point in a negotiation where the landlord is willing to walk away from the deal. This is a critical point in negotiation because it means the landlord feels that his/her alternate option (usually a vacant building) is no worse or riskier than the deal on the table. When you reach this point, you can be certain that you are securing the best possible deal and it is time to agree to terms.
Shift the Value Equation
Let’s consider a lease renewal. Your landlord will want to extract a rent that reflects your building’s value to YOU. This is especially so in a situation where you have a significant investment in your facility—in the form of capital, labor, or location. When you enter negotiations, your landlord may attempt to increase your rent simply because (s)he thinks you have too much at stake to leave.
In this situation, the key is proving to your landlord that leaving is a realistic and credible option, regardless of the investment. This cannot be achieved with idle threats, but instead requires a well-considered strategy, executed over time (see Practice #1). If performed correctly, by the end of negotiations your landlord will no longer be asking “How much more rent can I get?” and instead will ask “What do I need to do to keep you?”.
Tenants are frequently interested in committing to the shortest possible lease term for the lowest possible rent. Conversely, landlords covet lease term. They incentivize tenants by offering better economics in the form of lower rent and upfront concessions, such as free rent and tenant improvement money.
So, how do you get the economic benefit of a long lease, but retain the flexibility of a short lease? You build in the right to terminate at strategic points in the lease. This not only gives you flexibility, but can actually protect you from market fluctuations.
If rents continue to rise, then you can continue to pay below-market rent and retain the option to cancel the lease if other business factors require flexibility. If rents stabilize, or even fall, then you can use the right to terminate as a way to re-negotiate for lower rents.
Don’t be just informed, but be SAVVY.
Landlords have proven that they can be profitable throughout the peaks and the valleys of the market. Currently, rents are more expensive, landlords are more emboldened, and investors are more aggressive than they’ve ever been. Tenants have less overt negotiating leverage than ever before.
This means that simply following the market will not afford you the best possible deal. You need to become a savvy tenant by staying out in front of your deal, by anticipating your landlord’s strategy and tactics, and by understanding their motivations.
The more you educate yourself on the intricacies of the market the better prepared you will be for a successful negotiation, resulting in the best possible deal.