Successful Lease Negotiations for Property Managers

Our current economy has redefined the property manager and tenant relationship. In an effort to avoid vacant properties, property managers sometimes have less flexibility during the negotiation process, but those who have adapted are enjoying successful occupancy and low vacancy rates. Assimilating to this new leasing environment entails that several clauses be amended during lease negotiations to ensure property managers can seal the deal with potential tenants.

The facts
According to Co-Star Group, a commercial real estate information company, as of the end of the first quarter of 2009, 12.3 percent of office properties were vacant in the United States; 7.2 percent of retail properties and 9.2 percent of industrial properties were vacant as well. These vacancies have urged landlords to focus on retaining their current tenant base while obtaining more tenants.

Initial build-outs
When a new tenant occupies a building, it’s highly unlikely that the property they are acquiring will fulfill all their specifications. Tenants are now receiving money from property managers to prepare their new space to better suit their needs. This can be done either as a work allowance or as an initial build-out—where a property manager would remodel the space to accommodate the specific needs or wants of an incoming tenant.

“Generally, most landlords prefer to give a work allowance, but in some markets, the [property managers] have a hard time coming up with the money,” said Kristin Blount Senior Vice President/ Partner of Colliers Meredith & Grew, a Boston, Mass-based commercial real estate company.

Free rent and discounts
Property managers are often inclined to offer rental incentives such as reduced rents to retain or gain tenants in a competitive market. Property managers are not only relinquishing the first month’s rent, but they are also providing their tenants with longer periods of free rent. These free rent periods can be negotiated to occur any time during the tenant’s occupancy such as the beginning of the lease or scattered throughout a few years.

“Free rent periods are often structured to occur outside the lease term,” said Cliff Bogart, Director of KW Commercial, a division of Keller Williams. “Rather than doing a three year lease with free rent at the commencement of the term, the landlord may wish to negotiate a 39 month lease, with the first three months being rent free,” Bogart said.

Term flexibility
This down market has also initiated flexible lease terms. Property Managers are now accommodating their tenants with early termination rights. Should a tenant choose to execute an early termination, they are obligated to inform their landlord with advance notice. Tenants are also favoring short-term leases with options to renew. But property managers should be wary of offering potential clients too much.

“The risk for landlords with a short term lease is the uncertainty of this market,” said Blount. “Once the tenant has vacated, it may be a struggle to fill that space again.”

Subleasing
Many tenants are concerned about subleasing clauses. At some point during the duration of a lease, tenants may be concerned about surrendering all or a portion of their occupancy to a sublet. Tenants are negotiating to limit a property manager’s approval stipulations, and other potential hindrances, which could interfere with their ability to sublease.

Don’t concede on everything
According to Bogart, there are some clauses in the lease document that are subject to market conditions and others that property managers should not agree to, regardless of the market.

“Never agree to provisions that severely inhibits your ability to lease remaining space in the property,” Bogart says.

He cautions that property managers need to consider the impact that lease clauses have on the current and future value of the property. Though the negotiation process is protracted and arduous, keep in mind that six months of occupancy are far better than six months of vacancy.