Well last week we covered some of the basics of small commercial leases; this week we delve into negotiating the lease. Negotiating is without a doubt the key link in the leasing chain. The consequences of the negotiations are critical. Poor negotiating can lead to no agreement (lose-lose scenario), or one party having undue benefits and power over the other party (win-lose), or a great five year relationship for both parties (you got it, win-win).
Win-Win vs Win-Lose
I can't emphasize enough how many folks are still stuck in old, ineffective win-lose negotiating. So many go into negotiations to get the "best" deal they can for themselves at the expense of the other party, not understanding that especially in a lease scenario, this is the worst thing to do. Stop and think for a moment. You are negotiating a relationship with someone that is going to last at least five years and, with renewals, as long as twenty. How do you want that relationship to begin? How do you want it to develop? How you act now will set the stage for the next five years; trying to take advantage of someone doesn't go far in building trust.
Trying to get as much for yourself as you can with traditional win-lose negotiating may seem like the best thing to do, but usually isn't. The other side may not appreciate your negotiating and may spend the next five years returning the favour whenever the opportunity arises. With win-win negotiating, you still look out for your own interests, but look for opportunities to concede something to the other side if it helps you win something you need in return.
As an example, if you are the tenant and the landlord absolutely won't give you any free rent up front, maybe negotiate a larger tenant improvement allowance to help defray initial costs.
Know The Other Side
Have you ever watched the show Mantracker where an experienced tracker tries to find a couple of "prey" who are trying to get to an objective point miles away without being found? What does he say at the beginning of every show? "Know your land, know your prey".
The same applies in any negotiation process. Find out whatever you can about the other side. Search engines like Google are an amazing resource these days for researching people or companies.
Am I dealing with a large firm or a small "mom and pop"? Do they have more properties? If the other side is the landlord, maybe talk to a couple of their existing tenants, and view how they manage their buildings. If the other side is a tenant in other locations, go visit their sites and see how they maintain their lease space, maybe contact their landlords. Don't ever listen to anything someone said who knows somebody who rents from someone. That is not research; that is gossip.
If the other side is a large public company, your public library is likely to have loads of information on them including annual financial statements. If you have a stockbroker or online trading account, you can review more financial information about public companies.
To negotiate a good lease, you will need varying degrees of assistance from a few professionals. Depending upon the size of the lease in question, you should have on hand a good agent, attorney, accountant, design and construction people, and your lender. Good leasing agents and lawyers will do their best to keep it professional and negotiate in a win-win manner. A good agent will be able to do what is called "Net Present Value" calculations to help you compare several different lease scenarios to determine which will cost you the least or make you the most. If your agent can't, your accountant should be able to. Design and construction people can give you an idea of whether or not your idea is do-able and how much it will cost. Of course, keeping your lender informed goes without saying.
Preparing to Negotiate
The two most important things to keep first and foremost in any negotiations are your goals/objectives and the other side's. Clearly knowing your objectives will help keep you on track when the negotiations start to take unexpected twists and turns. Knowing (or estimating) the other side's objectives help you to give meaningful concessions to help get more of what you want or need. There is no use in conceding something to the other side that doesn't help them achieve their goals, but conceding something that helps them meet their needs in return for something you need is the hallmark of good negotiating.
The next thing you need to determine is your walk-away point. You need to know in stone above or below which point you will not go. There is nothing more powerful when negotiations stall than an ultimatum that is not a bluff. Remember, ultimatums are not good negotiating, in fact they are usually more destructive than constructive, but when you are at your limit, a real ultimatum as opposed to a bluff send a clear message you will go no further.
Offering a bluff ultimatum is very risky; it may get you what you want but if they call your bluff you have just lost a lot of negotiating power.
Once you know the other side, goals and objectives and your walk-away point, you are ready to negotiate. Just negotiate in good faith, using the professionals mentioned above to assist you, remember win-win and you can’t go wrong. Well okay, it’s a bit more complicated than that. In our next installment next week we will discuss two important topics in more detail, lease costs and lease documents, so stay tuned for
Small Leases: Part 3 – Lease Costs and Lease Documents