THE TENANT PLAYBOOK: Negotiating with the Landlord

Having now identified the 'premises' of your operation, what are the next steps to follow as you approach the Landlord? As noted earlier, hopefully you have engaged the services of a qualified leasing specialist to assist in negotiating a lease deal with a particular Landlord.

The first step is to qualify yourself or your operation with the Landlord. In short, this is a background/bio of your business and your credentials as a Tenant.  This might include years in business, expanding/downsizing, number of employees, and why these new premises are "fit for the future".  Depending on the situation, you may need to provide financials (particularly if the Landlord is providing significant TI dollars), a credit report and/or references.

In the case of a ‘new start-up’, you may need to provide a Business Plan which lays out your sales projections, expenses, capital investment requirements, and working capital needs. Given the fact the business is new, this should be supported by your credentials on a personal basis. Landlords are typically adverse to new start-ups. The more details you can provide at the outset the better. Be prepared to have a conversation on a PERSONAL GUARANTEE, particularly if the Landlord is investing capital on your behalf into the premises.

Beyond lease rate terms (the dollars of the deal), what item or items are most significant to your future in this location? Is it a suitable TI allowance? An extended rent free period? Dedicated parking? Early termination rights? Restrictive covenants on neighbouring businesses? Whatever the key elements of the deal are, you need to make sure they are front and centre as you begin the negotiation. The key points need to be 'on the table' now when finalizing the formal lease document, not left for the lawyers to deal with.

Successful lease negotiations do not just happen, but are planned for and well-executed by Tenants and their Leasing Representatives. As with everything in life, you do not get what you deserve, but rather what you negotiate. 

Next up from the TENANT PLAYBOOK: papering the transaction and types of documentation. As always, we're just a click or call away from discussing investment opportunities here in Windsor – Essex!

NET EFFECTIVE RENT (NER) – Good Idea to do the Math!

Whether landlords are doing incentives via TENANT IMPROVEMENT ALLOWANCES (TIA) or RENT FREE CONCESSIONS (RFC), the reality is that the stated lease rate is being affected and not necessarily in the landlord’s favour. The TIA involves an actual capital investment on the part of the landlord, whereas the RFI foregoes cash flow for a period of time. In either case there is a determinable cost to the landlord for these type of incentives and a prudent landlord should rightly do the math to understand the net effect.

NET EFFECTIVE RENT (NER) is basically what the lease rate actually looks like, after the incentive is accounted for. Consider the following for either situation on a 1,000’ unit being leased at $10/ft:

• RF Incentive OF 3 MONTHS – 3 x $833.33/mo = 2500 in year 1 
• NER = $7500 / yr. or 7.50/ft. ($10,000 - $2500 / 1000’)

• TI ALLOWANCE  - $5 / ft. x 1000’ = $5000.00
• NER = $5000 / yr. or $5/ft. (10000 - $5000 / 1000’)

It’s important to note that both of the above examples are calculated against only one year of lease income and assumes a one year lease. If the term is three years, both NER rates go up, as the total rent number is three times higher over the full term. It’s all simple math based on the specific deal. More importantly, it not only affects your cash flow but ultimately the return on investment for the property.

If we assume TIAs or RFC are a cost of doing business in your market, landlords need to focus on determining the NER early in the process when assessing any lease proposal. As with everything in real estate, in some cases the projected NER makes sense, while other times it doesn’t.

We welcome your comments about NER realities and experiences within your market. As always, we’re just a click/call away from discussing our investment opportunities here in Windsor-Essex!