Published June 2003

When leasing space,
think like a landlord

About 20 years ago, I taught an economics course to high school seniors through the Junior Achievement program. Fresh out of college and into the second year of my first “real” job, I wasn’t much older than the kids I taught, but I’d had enough of the real world, evidently, to qualify me to teach them about it.

The program provided a script and text, which I planned on following to a tee. Concepts like elasticity, supply and demand were all still very fresh in my mind from just a couple years prior and rolled off my tongue with ease.

Within the first 10 minutes of the first class, though, it became clear to me that I wasn’t reaching these kids with the prepared material. I threw the textbook aside and started with the basic economic information that I thought they’d need to know to make good decisions as young adults.

The first question was for them to write down what they thought their top five expenses would be when they got out of school — which I could tell was something they were sure they knew as much about as I thought I did at their age.

It wasn’t until we’d cleared the top five that rent even made the list. And rent, as we all know, is probably going to be No. 1 for every one of them.

The top five? Car payment, car insurance, car gas, entertainment and clothes. They looked good driving in their new car on their way to the movies, but evidently didn’t have anywhere to sleep that night.

Like the high school seniors pondering their economic future with little frame of reference, most people pondering leasing commercial space for the first time have little experience from which to draw.

The most common mistake commercial tenants make is forgetting that documenting the agreement between the parties is probably more in their interest than the landlord’s.

Once you’ve moved your business into the new space, the landlord now has all of the leverage if there’s a disagreement. After all, while he risks a potential vacancy, you have to incur costs to pack up, find another location and make the move. And he may have deeper pockets if it gets legal. Relatively speaking, it’s probably a bigger hit for you to deal with a dispute than for the landlord. So, document, document, document is the first priority.

The next most common mistake is that the landlord expects you to pay rent whether your business is a success or failure while you’re in his building. Once you obligate yourself to the lease term, getting out of it because you’re going out of business or business is slow isn’t an option anymore.

If your business struggles, you may try to ask the landlord for rent relief. Whether they’ll admit it or not, when landlords are asked this question, most are thinking to themselves, “Well, when times were good for this guy, he didn’t offer to pay more. So why should I allow him to pay me less now that he’s struggling?” Knowing this going in might help you negotiate a lease that acknowledges this reality and leaves more flexibility in case things don’t work out. Get this sorted out up front, in other words.

Tenant mix is another important issue that many business owners fail to consider when negotiating a lease. You may be able to negotiate into the lease some language to provide control over whom your neighbors might be and protect your product line or particular business interests.

Often, landlords do not want to place competing tenants in the same complex. They are looking for a tenant mix that supports the businesses and provides some stability to the rent stream. But in soft times, a rent check of any kind on a vacant space may be worth the trade-off to a short-sighted landlord. So place restrictions upon the landlord to ensure that he cannot rent to competing businesses or, in the case of restaurants, tenants with competing menu items. You may not get what you want, but you ought to at least have this subject enter into negotiations and see how far you can go.

Parking is something tenants often overlook but can sink the business in short order if you don’t have some control or assurance that there will be adequate parking for your customers and employees. Make sure there’s a parking provision in the lease.

Finally, term is very important. The longer you’re willing to commit to pay rent, the more negotiating leverage you’ll have throughout the process. If you want to rent for a year, don’t expect the landlord to roll over easy on anything you ask for. It’s a simple risk-and-return equation for him. You’re only offering a return on his investment in the form of a rent check for a year. If you bite off five years on a term, now you might be able to secure some provisions important to you.

Of course, hiring an experienced commercial real estate agent is a good way to reduce your risks. But thinking like a landlord for a moment before you go into negotiations will help you get your priorities straight.

Tom Hoban is CEO of Everett-based Coast Real Estate Services, a property management and real estate advisory company specializing in multi-family and commercial investment properties. He can be contacted by phone at 425-339-3638 or send e-mail to tomhoban@coastmgt.com.

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