Rented Space: The Art of Negotiating a Mid-Term Rent Reduction for Your Commercial Lease
Whenever I speak at a franchise convention, I inevitably meet many struggling franchisees leasing commercial or retail space. These tenants desperately need a rent reduction ... right now. The recession is taking its toll on all industries including franchising; sales are down, business expenses are rising, and the high cost of leasing space is closing in on tenants. Your monthly rental payment to the landlord can be one of your biggest monthly expenses. Therefore, reducing this monthly lease payment is imperative for businesses like yours to stay viable.
If one, or more, of your franchise locations were at the end of its lease term there would be hope for a rent reduction on the lease renewal. Unfortunately, many franchisees find themselves in trouble somewhere mid-term into a five-year lease agreement. In speaking to one franchisee just last week, he admitted to me that he was struggling in year one of a ten-year lease term for a unit he had recently opened.
Well, I want you to know that there is hope for a mid-term rent reduction! There are several reasons a commercial landlord would agree to a mid-term rent reduction for your commercial space:
a) To avoid taking the space back: Replacing a tenant can be very time-consuming and expensive for a landlord. There are real estate commissions to pay, demolition of the existing premises to occur, months of lost revenue while the space sits vacant, and so on. In addition, a new franchisee/tenant moving into the space will probably get a tenant allowance and free rent to boot. It could be quite a few financial steps backwards for a landlord to replace your business tenancy, if he can at all.
b) Other existing or pending vacancies: If the landlord already has other vacant units within the same property, odds are greater he won't want another vacancy. Even if the plaza appears to be fully-occupied by other tenants, many of your neighbours may be behind in their rent or planning to close out entirely sooner than you might think. Several existing tenants may not be planning to renew their leases so the landlord knows that more space will be coming available in that property soon. These make for all the more good reasons for your landlord to keep your tenancy, even at a lower rental rate.
c) A Downward Shift in Market Rents: If market rents have reduced because of the recession and the landlord is leasing space to new tenants at a lower rental rate than you are currently paying, then replacing you with another tenant is less desirable. Not only have you proven yourself as a more established tenant, the new tenant would be paying the lower (new market rental rate) making the landlord ultimately no better off.
d) Competitor closures: If other businesses in your industry are closing out in your area then the landlord will be more motivated to keep you open, even at a lower rental rate. When any tenant closes out the landlord (or the landlord's agent) tends to look for a similar use replacement tenant. If no other competitor tenants want to take over your location the landlord is better off keeping you open.
As I write this article, I am flying back from New York. Yesterday I was a guest speaker at a large business expo. One struggling business-owner told me that she just discovered that 30 percewnt of her co-tenants have been paying little or no rent for the past few months due to the recession. Could this be true, and how could she also pay less rent, she asked. In commercial real estate it's every tenant for himself. No two landlords are the same but they all want and need cash flow from rent-paying tenants. Chances are you won't be the first (or last) tenant to approach the landlord for a rent break - so why not do it now?
Here are a few realistic tips for getting a rent break. Be prepared to ask, ask, and ask again. Put your request to the landlord or property manager both in writing and verbally. Do your homework by determining if market rents have declined, and find out what other tenants are doing. If you want some professional help, don't turn to an attorney (landlords hate getting letters from lawyers about rent reductions). You need a professional lease consultant who can do a market analysis and who will speak to your landlord at a real estate level, not from a legal perspective.
Finally, avoid any individual or company offering to help you in return for a percentage/commission... this will only tarnish the tenant/landlord relationship.
Dale Willerton is The Lease Coach, a Certified Commercial Lease Consultant and author of "Negotiate Your Franchise Lease or Renewal". Call 800 738-9202 or visit www.TheLeaseCoach.com. E-mail DaleWillerton@TheLeaseCoach.com.