Seven Overlooked Strategies In Negotiating Your Commercial Lease

 

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Allison Williams  [00:00:02]  Hi everyone, its Allison Williams here your law firm mentor, and welcome to another episode of the crushing chaos with law firm mentor podcast, where today we are going to talk about the seven most overlooked strategies when it comes to negotiating your commercial lease. So this is a timely topic for lots of lawyers, me in particular, because I have gone through the Michigan wash of negotiating your commercial lease, I’ve done that now twice. And the first time was very different than the second time. The second time was the time that I would consider to be where I really got my sea legs, if you will, in the area of negotiating a lease because the first time was one paragraph, my lease, I shit you not my lease was one paragraph. And it was from a guy who kind of considered himself to be, you know, very much a family oriented man, he at least to my former business partner, I think I told you guys, I’ve been in partnership for all of seven months before we realized that this was a mistake that had to be done. But before we reached that realization, my partner was in a building, and I saw no reason for us to physically relocate,

 

Allison Williams  [00:01:12] I was not yet a business owner. So I said, Okay, fine, we’ll go into your building. And we just got a larger space, a larger unit within that building for the two of us to share. And ultimately, the negotiations were really, that I just refuse to be personally liable for the lease. And that was, you know, a conversation with the landlord over coffee. And then he sent us the one paragraph writer to my business partners lease. And when I asked, I said, well, I need to see the original lease in order to sign this writer. At some point, the landlord told us, he didn’t have it anymore. He said it was destroyed in a flood. And therefore, he would take out the language regarding it incorporating the previously. So literally, our lease was one paragraph. Now, you’re not going to get that dealing with a professional in 99.9% of circumstances. 

 

Allison Williams  [00:02:09] So my second time around, was much more illustrative of what you would experience in negotiating your commercial lease. And there were a lot of things that I didn’t know, now, thank God, I knew that I knew nothing about real estate. So I actually went to a friend of a friend who connected me with a commercial broker, and ultimately ended up working with a VP at Weikert. And I felt very confident in that process and had a lot of professional guidance as to things that I would have never known to even ask about. And so I learned a lot in that process. And I want to share some of that knowledge with you. So I have seven strategy seven strategies that I highly recommend that you consider, including in your negotiations for your next commercial lease. The first one I just told you, is to get help. Right? 

 

Allison Williams  [00:02:58] So strategy number one is to consult a commercial broker, it’s really important that you work with someone who is in the business of negotiating commercial leases, especially the first go round, because there’s so much that you don’t know that you haven’t ever thought to ask because a residential lease is completely dissimilar than a commercial lease, there are implications for what can be done to enforce rights as against an individual versus against a business owner. And oftentimes, those rights are much more onerous as to a business owner. Now, this is not to suggest that you ought to be in fear that you’re going to be taken advantage of or that you’re going to have an oppressive relationship with your landlord. Quite the contrary, obviously, a landlord has a vested interest in keeping a commercial tenant because you’re typically going to pay much more rent in a commercial space than you’d be paying in a residential space. And they also want to keep your relationship presumably longer than the first term of your lease, which could be five years could be 10 years depends. But certainly, it’s going to usually be more than one year. So you want to have that good relationship with your landlord. And I don’t want to instill the fear that you’re not going to have that. But there are different rights and responsibilities for a business owner and a lawyer in particular because of our licensure as legal professionals, that you have to be mindful of how you are approaching that relationship. And because someone who is well versed in the area of commercial realty is much more likely to be able to say this is customary versus not customary. What they’re asking for is in the ordinary course, are something a little outrageous. 

 

Allison Williams  [00:04:37] This is something that I think is well within the range of reasonable for you to accept. This is something that I think you ought to push back on. I would have never known that right, even though I litigate and I negotiate contracts where we’re living in the course of being the type of attorney that I am. I don’t necessarily know what is or is not standard issue in the realm of commercial Realty. So I knew it was important to get help. And I highly recommend that you do the same. I’m specifically recommending that you speak with a broker and not a real estate attorney. Because a real estate attorney may have reviewed hundreds, if not 1000s of contracts to deal with commercial real estate in his or her area. However, that is not the same as going into the minutiae II of what is standard issue in the general field of commercial real estate. A broker has a vested interest in getting you what you want, and obviously keeping that relationship with you. Because the next time you work with a broker, presumably they’re going to get another fee. Now, depending on your jurisdiction, this may vary. But generally speaking, the landlord is going to bear the cost of the commercial broker’s fee. So you’re not going to have the out of pocket expense for most commercial brokerage relationships that you would have if you were hiring an attorney to simply review your agreement. So there’s a little cost savings there, I certainly don’t want you to make this decision based solely on costs. But for those of you that have that concern, know that generally, you’re not going to have that expense upfront that expense is going to be borne by someone else. So seeking the help is that much more of a no brainer. 

 

Allison Williams  [00:06:19] Okay, strategy number two, that is often overlooked when it comes time to negotiate your commercial lease is the need to do research. Now, as a lawyer, most of us understand the value of research, we recognize that if we are going into a conversation with someone about what our needs are, as a business, we know generally what our needs are. But I want you to really start thinking about your research in this area is researching your marketplace. In other words, what is customary in your marketplace in terms of the range of cost, okay, one of the favorite resources, resources that I found early on in my search for commercial space was loop net.com. On loop net, you can actually see and put in regions that you’re looking for, for commercial space. And therefore you can find what people are charging per square foot. That is generally how you’re going to see commercial property listed. It is the price per square foot. And if you don’t know how to calculate what that means in terms of your rent, you would take the amount of space that you’re looking to secure times the price per square foot, and then divide that over the course of an annual lease, that will tell you what your monthly rent is going to be. 

 

Allison Williams  [00:07:33] Now that is just the rent, okay, typically, you’re going to see prices listed for the cost per square foot solely to rent the space, there are other costs that are factored into the total cost of your lease. And you need to be aware of those costs as well, which is another of the highly overlooked strategies for negotiating your commercial lease. Number three, is to recognize total costs, right? So what and what’s included in total cost that is beyond rent.

 

Allison Williams  [00:08:05]  So the first thing that you should think about is common area maintenance, okay? If you’re going into a nicer building, they are typically going to charge you as a member of the entirety of tenants in the building. to upkeep the premises that are beyond simply you’re immediately seeing space. So beyond your office suite, you’re going to look at the carpets and the walls and the painting, structural repairs the bathrooms, right, keeping all of those places clean, well maintained, well manicured, that isn’t a that is a cost that the landlord is going to incur. And typically that cost is passed along to some degree, in whole or in part to the tenants. So what is it, some leases will simply charge you a flat fee, some will charge you a certain percentage of your rent. And so if your rent is going to go up every year, that’s another cost we’re going to talk about in just a moment, then you need to think about the fact that your cost of cam, your common area maintenance will go up every year as well. So you need to be aware of that total cost. And that is typically going to be embedded in the in negotiations for your lease. 

 

Allison Williams  [00:09:13] Now, as I said before, one of the other costs that comes up very frequently with commercial leases, is escalations, right. So you might start in at $15 per square foot, but then it’s going to escalate to 1550 $16 $17 $18 and so forth over the life of your lease. escalations are very common because we know that inflation is a cost that we will all bear as business owners and with commercial Realty rather than have your landlord approach you and say, hey, the rent has gone up in this area or the costs have gone up because of inflation, time to renegotiate you negotiate that in advance. Now you might be thinking, why would I do it in advance because I don’t know what the rate of inflation is going to be. Well, generally speaking ESCO lations are set with some standard, it could be the general cost of inflation over some period of time that a landlord says generally speaking over the last decade, this is how much inflation has been. And therefore, I am going to assume that the rate of inflation will be relatively stable over the life of this lease, and therefore, I will impute it at a certain amount, that usually is what’s going on. Sometimes, landlords will look at Consumer Price Index and actually calculate the escalation based on whatever the rate of inflation is per year. So in other words, you’re not going to have 50 cents a year escalation or $1 a year escalation on your square foot rent lease amount, you’re instead going to have a certain percentage. And that percentage is going to be based on a formula that’s set forth in your lease, whatever it is just know going in that usually when you start to look at the cost per square foot, you don’t just have the cost per square foot to factor in when it’s time to negotiate your lease. 

 

Allison Williams  [00:11:05] Okay, strategy number three that is greatly overlooked when it’s time to negotiate your commercial leases is considering the tenant inducements Okay, now, tenant inducements are an opportunity for you, as the business owner to get a better deal than what would normally be set forth on paper, or set forth in the offering that’s made online when someone lists commercial space for lease. So typically, what was the most common inducement that business owners don’t know about is free rent, right? When you think about coming into a space, the landlord doesn’t just have a vested interest in renting the space today, he or she is creating a relationship with you as the business owner, and professionals, professional practices tend to be one of the most stable lessees, less orders lessees, less orders, tenants, we tend to be really great tenants, right? We don’t throw large parties, we don’t do a lot of damage, we obviously want to keep the space looking professional. And so when a landlord is looking to create a relationship with a business owner, we are desirable, know that going in. Not only are we desirable because of our status as professionals, because we don’t just have legal responsibilities under our lease, we have professional responsibilities as licensed attorneys. So knowing that, of course, we tend to not universally, but we do tend to be better tenants. 

 

Allison Williams  [00:12:38] The landlord’s know that. But there’s something else to consider that will make us desirable, which is the amount of time that the space has been on the market, the longer a piece of space up, a piece of space has been available on the market without leasing. Of course, the more economic constraint that the landlord has, because he or she will still have property taxes for that space, whether it is a fully rented building, or only one out of 50 tenants are in the building, they will still have a mortgage if they have mortgaged the property. So they are going to have an incentive to get a person in in a way that a fully leased building that maybe losing one tenant after 15 years of having a fully leased building, it’s just not going to have right. So I want you to think about that as an opportunity. Because it is very common in those scenarios that a landlord is willing to do things like give you free rent, right? I remember when we moved to this space here in lovely Short Hills, New Jersey, my landlord had no tenant in this space. And in fact, this space was completely raw, my space had no floors, no ceilings, the windows had no blinds on them, it was just a big open lot of emptiness. And because of that they were eager to get someone in, I was willing to take 1000s of square feet. We started with 4000 on the first floor and then added 5000 On the second floor. 

 

Allison Williams [00:14:04] So I ultimately took 9000 square feet of space. And so they wanted to induce me to get me excited about the prospect of coming here. And one of the costs that will typically be borne by a business moving into a new space are moving costs, moving costs. Oftentimes there are new fees associated with setting up utilities or phone service when you move from one place to another. And so to help defray that cost, they will induce you to come to their space with free rent, the longer term of your lease, and the more you are paying in rent, the more likely a landlord is to increase the amount of free rent so we ultimately got three months of free rent, even though one month is certainly reasonable for just about every commercial lease agreement negotiated right everything is subject to negotiation. All you can do is ask all they can do is say no, so why not ask. Okay, strategy number five as to what you should consider At or when you are negotiating your commercial leases, one of the areas that are greatly overlooked is the competition clause. Okay? If you are a business owner, you want to be sure that you have the greatest opportunity to market yourself in the new space. So as a landlord looks at a tenant, they are typically just seeing the tenant as an opportunity for renting out the space. You on the other hand, looking at a landlord should be looking at what is your opportunity to maximize your marketability in the space that you’re going into? So that includes things like, where is it?

 

Allison Williams [00:15:07] What are some of the benefits of the area where you are maybe some benefits of the building other professionals in the building. But what happens if a law firm that sells the exact type of service that you sell moves into your building? Right, that can be really challenging, if you both are playing an aggressive game with digital marketing. As you may have heard on this podcast and other places, right now, Google is really prioritizing your local vicinity. So if I am in this building, and I am promoting myself as the fill in the blank law service in this building, right, I want to get to number one in my building for criminal defense, or for estate planning, or for family law. And all of a sudden, someone that sells the exact same service, who also wants to be first in our market moves into this building, they’re going to be in direct competition with me four eyes on ads. So for all intents and purposes, I’m going to reduce my effectiveness simply by virtue of having a direct competitor in my building, you can ask and negotiate in your commercial lease that the landlord has to get the approval of you before anyone with a comparable service to yours, is allowed to move into the building. 

 

Allison Williams [00:09:53]  Now, you might be thinking, Well, why would the landlord ever do that? Because what happens if John Doe law firm wants to move in and they’d be taking even even more space, they’d be more desirable as a tenant than I am. And they’re willing to write a very large check to come into the building, would the landlord really be inclined to say no? Well, again, this goes back to how desirable is the space? And how long has it been on the market, if a landlord is desperate to get somebody in, they’re going to want to do what they can to keep you and they’re not going to want to do anything that would cause you to go elsewhere. If you say, hey, look, if you won’t agree that a comparable law firm, same service is not allowed to move into the building without my consent, then I might not be inclined to come here. And of course, as with everything, if you don’t ask, the answer is always going to be no. So throw it out there, talk to the landlord. Sometimes, landlords will agree to an exclusivity clause that you will be the only lawyer of a certain type in your space for a certain period of time, right? Maybe you have a five year lease, and they’ll agree to guarantee it for three years. By that time, maybe you will have built up a large enough presence online, that someone coming in would really have to be a mammoth in your area. And the likelihood of that is probably pretty slim. It’s possible, but it’s not as likely. So you want to think about that in terms of what your goals are for your business. All right, strategy number six, greatly overlooked. And this is probably one that was probably top of mind for you, when we started having this conversation about leasing space. But you will be surprised how many lawyers don’t consider their future goals for business growth when they move into a space. 

 

Allison Williams  [00:18:39] 

Okay, this is a biggie. For a lot of us, we know what we need right now. And we probably know what we need next year, right? We probably have an idea of, I have X number of people right now, I am growing and therefore I am likely to add one attorney and one paralegal and one marketing assistant. I need space for those people. And you figure that out. But I want you to think about longer term space needs and what to do if your landlord can’t accommodate them. Okay, so the first strategy is number six, this is really, do you have a plan for your future growth? Your future growth is not simply I want to scale to a bajillion dollars over the next decade. Okay. 

 

Allison Williams  [00:19:27] When are we talking about future growth we’re talking about, you’re planning over a reasonable term of projection at least five years for how much you need right now. How much you’re going to need in a year, how much you’re going to need in three years, how much you’re going to need in five years, because you want to make sure that you get adequate space to accomplish your growth goals. I remember the very first time I moved into my very own commercial space as a new law firm owner, and my space felt huge to me. At that time. It was a little Over 2000 square feet of space. And I remember it had a big open well, and it had offices around the perimeter and office in the back, a large conference room, three offices around the front front reception area, and then a large closet in the back, which I ultimately had to move into. When we outgrew our space before we could move to our new, bigger space. In fact, it was a big joke around the office, people would say, the move is gonna let Allison finally come out of the closet. My parents thought it was really funny. And I had to tell them, we mean that in the literal sense, not the figurative sense, not that it would have mattered one way or another. But it’s kind of a funny thing, right? 

 

Allison Williams  [00:20:38] I literally it was in the storage closet, because we ran out of space. But when we first moved in, it was like, Oh, my God, I have this big open well of space, there is space everywhere. And I could literally hear an echo when I would holler back to the back of the room or the back of the office, if let’s say my secretary was in the back, like filling up, filling up the supply closet in the back, or getting supplies to the conference room. If I hollered back to her, I could hear like a reverberation. But the beautiful thing about that is that that actually fueled my energy to fill the space, I knew that I didn’t want to just stack bodies, I wanted those bodies to be making me money. So I knew I needed to engineer a plan that would afford more people, but that more people would also produce more revenue and eventually more profit. And so having that empty space was actually quite an inducement for me to get my gut, get myself into gear so that I can make more money. Not everybody’s gonna have that same inducement. Some people, you hear all that empty space, and you think, Oh, my God, I’ve gotten too much, right? That is very much a mindset orientation. And for those of you that are in the goal in the energy of growing a business, that empty space, can and should very much be upon you, as a call to action to get yourself into gear

 

Allison Williams  [00:21:58]  

so that you can ultimately grow your business. Alright, the seventh and final strategy, and I referenced it just a moment ago, when we’re talking about your space needs. Thinking about your future, one of the things that you have to consider is that your landlord may or may not be able to accommodate your growth. And you definitely want to consider including a negotiation clause that says if the landlord cannot accommodate our space needs, and we outgrew our space, we will be let out of the lease. Okay, this is not that uncommon, it is not uncommon at all, when you ultimately have an aggressive growth plan. And in fact, even though negotiations can very much be a simple, I’m making this request because I want it and the landlord says I’m denying your request because I don’t want it. Yes, you can have that type of yes, no binary conversation. But if you want to create a relationship with your landlord, being candid about what your goals are, and how those goals not only further your objective, but his or her objective can be a great way to kick off a relationship that is going to sustain you and help you over the years as you are growing your business as you meet things for your business that your landlord can actually accommodate. 

 

Allison Willams [00:23:12] So think about it this way. If you have a conversation with your landlord that says, hey, look, I am a growing business right? Over the past five years that I’ve been in business, we have grown by 387%, I have been very intentional about that. I have been adding up team, we are coming here because we feel this is a highly marketable space, because you have other professionals in this building that we can create referral relationships with and I want to be here for the long term. However, as my business grows, I can’t stifle the growth of my business. And I don’t want to start segmenting my business by having half of my team here and half of my team somewhere else. 

 

Allison Williams  [00:23:52]  

Incidentally, I actually did that I had half of my team on one floor and the other half on a higher floor. Very, very bad for business was not a good relationship. It created kind of a Us and Them relationship that was very toxic for my business. And I had to work very hard to to clean that up at some point after we started realizing the dissension in the ranks. But just imagine what that dissension would be if we had one, one part of the firm in building a and another part of the firm and another building down the street and around the corner. Even more dissension. So for most businesses, you’re not going to want to do that whether you have a partially virtual partially in person business, or everybody is under one roof, you’re going to want to have the ability to have as much of your team altogether as possible. And to that end, if you outgrow the space that you have, you can stack bodies to a certain degree, right. I had a large partner office that at one point I segmented into three separate desks because we needed the space and I had to put my people somewhere wasn’t ideal, but it worked, right? 

 

Allison Willams [00:25:02] You can be creative with your space, but only to a certain degree, at some point, you’re going to outgrow your space if you believe in your ability to grow business the way that I do. So, ultimately, as you are thinking about that your conversation with the landlord should reflect it, you should be candid, we have a growth plan to grow by another 200% Over the next five years. And consequently, we are not going to want to stay in this space, and not have adequate room for everyone. So I need a clause in the lease, that if we outgrow the space, we do have to approach you, right, we can’t just move because we reach a certain capacity limit. But if we reach the capacity of our space, and we approach you and you’re not able to accommodate us, because there’s no space in the building, we have to have a reasonable exit clause. Now reasonable exit can be a certain number of months of notice, right? Most landlords are not going to accept that you say, hey, it’s Monday, I want to be out on Friday, because I found another place that’s bigger, right, you’re gonna want to give them some adequate notice. adequate notice could be 60 days could be 180 days, depends, right. But ultimately, you do want to create that type of relationship so that your business doesn’t get stifled in the space that you have. 

 

Allison Willams [00:26:17] I will tell you, when we outgrew the space that I was in, and I literally had to move myself into the closet, I took my partner office, I had to have an area that was just my area, because I had confidential employee records there, as well as other confidential information about the team about the firm finances, etc. So I had to have all that information in a space that no one else I hadn’t had access to. But my office was the big partner office. And when we needed to add people because we had outgrown the capacity to serve our clients, I added two more lawyers at once. And then we essentially had two lawyers and a third paraprofessional who had no place to sit. So the only option was my office, which was the largest office. And we subdivided it so that we could ultimately fit three people in there. And the only other place left was for me to leave the premises or work on site. At the time, I was not really happy with the idea of working at home, I didn’t have the infrastructure to work at home, I didn’t have a desk at home, I knew I would not be as productive at home. And frankly, I didn’t yet have the relationship with my team that I felt they would be best led by a leader who was off site. 

 

Allison Willams [00:2732] Now we’re essentially a virtual law firm. So it doesn’t really matter where I work. I work in connection with them basically facilitated through technology. But at the time, we were in a different place. So it didn’t make sense. And I needed to be on site. So I moved myself into the supply closet, me and my two birds and my tight little desk. We were kind of sitting on top of each other like this, but we made it work right. But that couldn’t have been a long term solution. And that wasn’t the best solution. And if I had had more knowledge, if I had been better informed, when we negotiated that lease, I could have actually exited exited that clause exited that lease, because of a clause that would have allowed for it. So that’s my recommendation to you. 

 

Allison Willams [00:28:13] Now, this is not an exhaustive list of everything you need to do in a commercial lease negotiation. Obviously, there’s a lot to this, that I personally do not know, there’s a lot to this that you should be getting from your commercial broker, your commercial broker is your friend. You want to have help with this. That is strategy number one for a reason. But I did want to share with you some of the things that I’ve seen my clients, my colleagues, my friends overlook some things that I personally would have overlooked but for the guidance I got from my professional real estate broker. All right everyone, I am Allison Williams, your law firm mentor. You’ve been watching the crushing chaos with law firm mentor podcast. Have a great day.