LEASE NEGOTIATIONS: TWO SUBTLE THINGS THAT CAN COST (OR SAVE) YOU MONEY
There are a number of business terms that landlords and tenants negotiate in a lease or renewal that on the surface seem very straightforward. Two examples of subtleties tenants should pay attention to during negotiations are concessions (e.g. free rent) and renewal options.
Even though it is currently a “landlord’s market”, property owners are generally still paying concessions such as free rent to new and renewing tenants. Tighter submarkets such as North County Coastal are offering up to about a half-month of free rent per year of term for new leases (limited abatement for renewing tenants), while submarkets with higher vacancy rates are often providing close to one month per year of term. The question is, if most buildings in your submarket are paying X months of free rent, does that include NNN expenses? The difference could cost or save you 20-33% of the total amount of abated rent. Tenants should push for free base rent and NNN expenses
during the abatement period.
Most leases include one or two 5-year options to renew the lease at fair market rent. Straightforward enough, right? But how is fair market rent determined, what is the mechanism that kicks in should the landlord and tenant not agree on a fair market deal (if there is such a mechanism at all), and is the landlord including language which states that in no event shall the tenant’s rent decrease below the rent the tenant is paying at the end of the prior lease term? Does the overall fair market package include concessions or TI/refurbishment allowances? What younger or less experience doctors often do not realize is their more experienced neighbors leverage their broker and negotiate new lease terms outside of
the renewal options. Doing so will help you avoid being tied to the landlord-friendly renewal negotiation process for determining fair market terms, burning a valuable renewal option and killing your chances of negotiating a below-market deal.
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