Drive a Hard Bargain in Leasing Space

For 10 years, whenever insurance agent Jack Houston looked up from his desk, all he saw was traffic chugging along the busy street in front of the strip shopping center where he worked in Woodland Hills.

“I wanted to get away from the smog, traffic and graffiti,” Houston said. “I needed a change.”

He wanted a new office closer to home, in a more professional setting for his State Farm clients.

A new retail and office building in Calabasas with a pastoral view of rolling hills caught his eye. After friendly negotiations, including the tenant improvements he wanted and five months of free rent, Houston signed a five-year lease.

“When you are looking for space, it’s important to think about the future,” Houston said. “My business wants to grow, and I can move to a bigger office within this building.”

Because rent is probably your biggest expense after payroll, knowing how to negotiate the best lease for your business can save you thousands of dollars over time. Being a savvy negotiator will also reduce your anxiety about moving, according to leasing experts.

After deciding whether your business belongs in a retail, commercial or industrial space, find out the landlord’s conditions for leasing the property. Ask about all pass-through costs, reimbursement for tenant improvements and options to renew.

In much of the country, the real estate market is soft and business owners should be able to get several rent-free months, especially in a new building, according to John Van Trigt, a partner in the Los Angeles accounting firm Parks, Palmer, Turner & Yemenidjian.

“And if you talk to your accountant about structuring the lease properly, you can still take a tax deduction for the free-rent period,” advises Van Trigt, who specializes in real estate matters.

Most landlords expect you to sign a business lease ranging from three to five years, often with options to renew. Ask the landlord if you will be responsible for paying any real estate taxes and be sure that these kinds of costs have set limits before you sign.

Be sure to ask if tenants are responsible for management fees if the landlord relies on an outsider to manage the building. These fees should also be capped at a certain point.

Determine exactly how many parking spaces go with the office space, where those spaces are in the lot or garage and whether you can put your company’s name over the spaces. Ask, too, if you can get more parking as your company grows.

Even the smallest buildings usually have signs on them, and having your name on the building is excellent free advertising. If some other firm’s name is on the building, Van Trigt suggests asking the landlord for an option to put your company’s sign up if the other tenant leaves.

Once you’ve decided that you like the location, the space and the terms, visit similar offices in the building to see how other business owners have built out the space. If it’s a new building or changes must be made, find out if the landlord can recommend a space planner to help you design the office.

Before you sign a lease, make sure that there is enough power to run your computers, telephones and other equipment. And ask the landlord if additional space might become available if your operations expand.

“The bottom line is, everything is negotiable,” Van Trigt said.

Making sure you have an option to renew at a predetermined rate rather than the market rate is also important, according to Ken Hoffman, president of Retail One, a San Francisco commercial real estate brokerage that specializes in helping retail stores find space.

“Find out if you can assign the lease or sublet the space so you can bail out if it doesn’t work,” Hoffman advises. “Leases do have value and can be sold if the landlord permits it.”

Hoffman predicts that most retailers around the country will have a weak holiday season, but said “those retailers with deep pockets, who can wait for the economy to turn, can negotiate their leases from a position of strength.”

Jeff Johnston, vice president of the Johnston Group, which owns the Malibu Canyon Plaza building where Jack Houston leases space, said that at times small tenants are tougher to deal with than large ones because they are less sophisticated.

Johnston, whose family firm owns and leases about 500,000 square feet, suggests that small-business owners carefully check out the area they want to move to. This way, they will know what other landlords are charging and have a realistic point to begin negotiations.

Business owners can usually get a better deal on office space than on retail space, which is generally more expensive.

As do most landlords, Johnston requires an updated financial statement and references from past landlords.

“The better your credit is, the more clout you have in the negotiation process,” Johnston said.

Remember, before you sign anything, be sure to have your accountant and attorney review it.