THE BLOG
12/10/2013 06:35 pm ET Updated Feb 09, 2014

The First Requirement For Successful Lease Negotiations Is Information

The always-exciting Houston commercial real estate market is in full recovery with market conditions achieving record levels of leasing and construction activity as major energy-related companies sign up for large spaces in proposed and under-construction projects, according to quarterly market research compiled by Commercial Gateway, the commercial division of the Houston Association of Realtors.

Where does that leave companies whose management is thinking about expanding, or relocating -- or even just renewing a current lease? With a lot of homework to do!

Lease renewals

The easiest scenario is a renewal.

Advice to managers: Don't just show up. Even on a simple, straightforward renewal there is a lot to be considered. The first step is to get the current lease out and have it reviewed. Things change and terms or concessions the company may not have been able to work into its lease four or five years ago may be easy to get now.

Get a professional to review the lease. If a company retains its own tenant advocate to represent it at lease negotiations the tenant advocate will want to review the lease as early as possible (depending on the size of the lease, up to one year in advance) and there is no additional cost.

Sounds too good to be true? When a company chooses its own advocate, the advocate is paid from the landlord's representative fee, which is already factored into the lease. Frequently tenants don't realize that they can choose their own advocate rather than using the landlord's representative with no impact on the bottom line.

Relocations

If the situation is a little more complex -- an expansion, a move, a totally new business -- there are a lot of decisions to be made, but plenty of professionals are willing to help.

Probably the first set of considerations surround location. Beyond the practical matters of proximity to clients, resources and transportation, there are also image considerations with big potential impact on the business' success.

A company doesn't always have to choose between cost and image considerations. It may be able to secure a lease at a good price and still move into a property that will project an impressive image.

For example, when a major engineering firm acquired a smaller one, the company wanted to improve its presence in the Houston market by expanding and upgrading from a Class B to a Class A property. Its tenant representative, Customized Real Estate Services, used up-to-the-minute information to negotiate a below-market rental rate and extensive construction management experience to lower construction costs. The net savings over the lease term was over $200,000.

Advice to prospective tenants: Create a list of potential neighborhoods based on the business' specific needs and then start gathering information about the types of businesses in the area, the tax implications, building management and types of space available. A tenant advocate can cut through a lot of information and help the company get down to the important facts on the areas that are most suitable for relocation.

Once the list has been narrowed to specific buildings, make sure the right questions are asked when space is shown. A good checklist is critical. It helps in the selection process, and any shortcomings the managers choose to overlook can be a part of the negotiating process.

Then of course, it's time to consider cost. In today's market some areas of Houston are tenant markets, others are landlord markets. And that can change very quickly. It's important to have current information about deals being made to know what can reasonably be expected to be achieved in lease negotiations.

Once first- and second-choice buildings have been selected, and the real range of potential in terms of financial commitment is known, it's time to start making a list of concessions the company wants as part of its lease. Anything that is not negotiated before the lease is signed is unlikely to happen. A tenant representative can help determine the lease points a given landlord is likely to negotiate.

Always start negotiations with a back-up building in mind. One of the secrets of successful negotiating is being able to walk away if the landlord is not, for whatever reason, ready to deal.

Sometimes the landlord may have a larger tenant on the back burner and so is less inclined to offer the rates and concessions. If managers have somewhere else the company can go, they can afford to be firm on points that really matter in the long run.

Successful lease negotiations start with information. The more decision-makers know and the earlier they start planning, the better their chances for getting exactly what they want and at the best possible rate. The tenant should be sure to take advantage of the professional advice that is available for the asking. The landlord's job is to get the maximum rate for every square foot of space it leases. The tenant's job is to get the best space available at the best rate possible.

This blogger graduated from Goldman Sachs' 10,000 Small Businesses program. Goldman Sachs is a partner of the What Is Working: Small Businesses section.