Negotiate Three Key Items in Lease for Unusual Space
Unusual buildings—ones with “character,” a unique layout, or historic elements—can be wildly successful, but you’ll need to take into account marketing and leasing issues that may not be a factor when leasing traditional commercial properties.
Marketing your space effectively is key if you own a “quirky” property. Most businesses can operate out of traditionally configured space and don’t want or need to consider other properties. But that doesn’t mean that it will be impossible to find tenants to lease your unique space.
The owners of unique spaces and the agents who represent them have an advantage: Tenants seeking a more intimate environment with character that’s evident before they even enter the lobby will be interested in seeing the space. And because it’s so different from common—and in many areas, plentiful—“vanilla box” space, you may not have as much—or any—competition from nearby buildings.
Another factor in your favor is that, typically, trying to impose a type of character—charm, grandeur, individuality—into a vanilla box office, or even many competing pre-war office buildings, adds to the cost. Unique spaces can’t help but provide free character.
A solid marketing plan is important for attracting tenants. Some of the unusual aspects of unique buildings could be seen as negative—unless they’re portrayed as an asset to prospective tenants. Your broker should explain the benefits of an unusual configuration or any aspects of the space that add character or upsides. Remind the broker to point this out when showing the property. Potential tenants that view the property might embrace the character of the space and want to preserve it as much as they can, once the value in it has been talked about.
So be prepared for negotiations for unique space to be different from traditional bargaining. One typical issue is increased rent. Shorter terms with rental “bumps” and/or higher annual increases are common requests from owners during this type of negotiation. But, as you should with all leases, think about what terms work best for you. Some owners are looking for a maximum of two- to three-year terms, and others want a minimum of five years to justify work that’s been done and the initial lower rent so the vacancy can be filled. An empty space costs you money, so it’s imperative to be as accurate as you can on pricing.
Renewals are another key item to debate. Some tenants are looking for shorter lease terms and options to renew. If you’re not happy with that option, but don’t want to lose the prospective tenant that’s requesting it, you can protect yourself by crafting a renewal clause that guarantees a set increase in rent at renewal time that you can live with.
For example, for a lease with escalated annual rent increases, ask your attorney about a clause providing that the new rental rate at the time of the renewal can’t be lower than the then-escalated rent, and must be increased by no less than 5 percent. It’s easier to assign a set increase rather than haggle about fair market value and how that’s going to be established, in the case of smaller spaces.
And free rent is a sticking point. Free rent periods are typically much shorter when owners are doing the majority of the work, which is often the case with a building that has characteristics or historic features that should be maintained only by the owner. Specify in the lease what work you’ll do to the space and the building, and what is expected of the tenant, if anything, regarding that work.
Many tenants push for multiple items, which makes it difficult to convince an owner to take a lower price per square foot and invest in major improvements. However, the upside of improvement investments is that they make the building and the space better, and may help with tenant retention. Be careful about your pricing and realistic about the market.