In every lease I negotiate, I find my years of experience managing properties for the landlord of immeasurable value. My understanding the landlord’s business guides me to negotiate where I know I can get great results for the tenant and helps me set the tenants expectations where I know the landlord will be immovable. This varies from deal to deal and an experienced tenant rep broker can tune in to the economic forces at play in every situation.
One of the more challenging terms to negotiate is the rent for future renewal options. Most landlords default to “fair market value”. I always try to fix the option rates for my clients, but sometimes the landlord digs in his heels and the best I can do is negotiate in the lease language to insure “fair market value” must be arrived at fairly and cannot be set arbitrarily by the landlord. As lease terms get longer and options are further out in the future, it is time to concede that “FMV” is really just fair to the landlord. I have to explain to my tenant clients sometimes the fundamental principle of the landlord’s business: with the risks they assume when they invest in property, they are entitled to reap the rewards of an improving market.
I had a client who was looking to lease retail space in downtown L.A. We negotiated a ten year lease and managed to cap the rent increase for the first five year option, but the landlord held firm on FMV rent for the second option. We are talking about 15 years down the line. The tenant was mortified. “The landlord could double or triple my rent! I can’t stand it!” I had to talk my client off the ledge. I did so by explaining that fair market rent is what a reasonably successful tenant can afford to pay on a sustainable basis. To set the rent at a higher level only guarantees that the landlord will have a failed tenant and a vacant store. And if this client’s business was still in this location 15 years from now, chances are he is operating a reasonably successful store!
Risk is inherent in commercial real estate whether you are a landlord or a tenant. Don’t be paralyzed by irrational fears.