Common economic sense guides the framework of most commercial real estate leases. And a successful negotiation takes into account the financial objectives of both the tenant and the landlord.
For both parties, the primary economic factors are the rental rate, the free rent concession (if any), and the investment of capital by one party or the other in the form of tenant improvements. There are some capital expenditures that just impact one of the parties: for the landlord, it is lease commissions paid to the brokers responsible for putting the deal together. For the tenant, it is the fixturization of the space.
One key factor that is not technically considered economic is the length of the lease term. In most circumstances, the landlord sees more value in a longer term contract over a shorter one and the tenant often prefers the shorter term to avoid being stuck in a lease given the uncertainty of the future. An effective tenant representation broker knows how to keep the landlord’s value proposition in mind when guiding the tenant toward a deal tailored to their business needs:
Does the tenant need lots of free rent for a long buildout period for a retail space? A longer lease term may appeal to the landlord and soften his resolve.
Does the tenant need the landlord’s capital to build out office space to the tenant’s specifications? Here again, a longer term means a longer amortization period for the capital investment and helps the landlord rationalize the expenditure.
The absence of free rent or capital expenditures in a deal for a space that the tenant can put to use in its current condition reciprocally opens the door to the possibility of a short term lease.
While the push and pull of the economic forces outlined above are evident in just about all lease situations, the nuances of needs and circumstances present many complications. It’s like a football game – a successful team adjusts their game plan for each opponent.
When it’s time to make a game changing real estate decision, bring in an experienced quarterback to help strategize the drive to the goal line.