By Codi Jordan, CRE Acquisition Specialist
Everything is negotiable.
Unfortunately, the best time to negotiate is on the front end of the lease term and not in the middle. Even more unfortunately as a medical space occupant, you probably received a Tenant Improvement package at occupancy that increased your rent throughout the term. It's expensive to build and occupy medical space and your landlord knows it! This makes it difficult to threaten to vacate the property, which is often the best tool that a tenant has when negotiating rental rates.
Even though the options are limited in these scenarios, here are a few to consider:
1. Blend & Extend
There is nothing more appealing to a landlord than a long term lease. Turnover costs them money. They want you in place utilizing previously spent improvement allowances for as long as possible and then a little longer. You can use this to your advantage by offering to extend your commitment in exchange for cheaper rent. If you are 2 years into a 10 year lease agreement, then this doesn't have very much appeal to the opposition. However, if you are in the latter half of your term, then the conversation becomes much more interesting to a landlord that just wants to go to the mailbox and pick up a rent check every once in a while. This is a great time to discuss resetting the base year for operating expenses in the lease as well.
2. Sublet Space
The ability to execute this tactic is highly dependent on the conditions of your lease, which again emphasizes the importance of the initial negotiation prior to occupancy. Most agreements allow for a sub-tenant to occupy upon written consent from the landlord. If your space easily divides into separate areas, then it's easy to attract young dentists or therapists who are ready to make a name for themselves but don't want the huge overhead to start up. Use all that equipment that you are paying for to your advantage. Depending on the sublet clause in your lease, the type of equipment you control and the office layout you may be able to turn this into a profit center, not just a subsidy.
3. Renegotiate Tenant Improvement Amortization
The landlord put money into the space when you occupied. Paint, carpet, walls, electrical, plumbing and mechanical improvements were likely made shortly after you signed on the dotted line. These costs were amortized over the term of your lease and your rent was increased. Ask your landlord how they paid for these expenses to see if there is an opportunity to modify a note in some way. Often times, the landlord will have refinanced the property and the debt associated with the build is paid off or wrapped into a larger note with a smaller payment. It's good practice to determine what the TI package cost because you'll want to use it to negotiate your payment upon renewal. See if your landlord is willing to share in the benefit that your stabilized cash flow has created for them by reducing your rent a little.
4. Threaten To Close Up Shop
The last thing that a landlord wants is a vacant space. Especially in a down market or a pandemic. Starting the conversation with your landlord about your struggling business performance is never easy, but it often leads to better scenarios for both parties. However, many leases contain clauses that increase the landlords punitive damages based on bankruptcy, gross sales, default, insurance limits or other conflicting conditions that pop up when a business is struggling. Be sure to read your lease thoroughly before starting the conversation with the landlord. Unless you wisely negotiated for the benefit upon occupancy, many leases don't allow the tenant to sell or assign ownership of the business over to a different party. If you are struggling, it's a great time to renegotiate the terms of an ownership transfer as the landlord will see it as a better option than a vacant building.
5. Ask If Your Landlord Will Let You Leave
Under certain market conditions, the landlord may be able to achieve a higher return by leasing the space out to a different user. It's not very common, but sometimes they'll simply let you get out of the way! It's still important to understand your obligations in this scenario, so make sure you get a written cancellation in hand before you head on to greener pastures. The landlord may also allow you to market the space for lease and release you from the obligation upon landlord approval of a new occupant.
Under any of the above scenarios, it's important to have up to date and comprehensive information in hand before you make any decisions. Greener pastures may not exist, which will make it easier to accept the space that you are in. At Logical Move, we specialize in protecting your interests. For lease modifications and negotiations, we charge a consulting fee based on 40-60 hours of work, which averages around $5,000. We'll never charge you more than the savings we'll negotiate for you!
You focus on what you do best and we'll tackle your landlord.
Today | Closed |
We use cookies to analyze website traffic and optimize your website experience. By accepting our use of cookies, your data will be aggregated with all other user data.