By Dale Willerton / Jeff Greenfield
As we explain in our new book, Negotiating Commercial Leases & Renewals FOR DUMMIES, free rent is just one negotiable factor in a commercial lease. Even if you did not receive a rent-free period when you signed your first lease, you may be eligible for one when you renew although you may have to work a little harder to get free rent on a renewal.
This is probably the most unpredictable but most interesting part of the lease agreements we negotiate. Some landlords are quite flexible when it comes to free rent but others are not so liberal. To demonstrate, we remember one tenant we negotiated the first four years minimum rent free, on a 10-year lease. For another tenant, The Lease Coach negotiated for 18 months free rent plus a $180,000 tenant allowance. Free rent on lease renewals is not unreasonable and often achievable in some situations – if you know what buttons to push with your landlord. Here are some tips to remember for independent retail tenants:
Negotiate (Ask) for More Than You Expect to Get: Free rent is often one of the easiest concessions for a landlord to make. As a general negotiating rule, always ask or negotiate for more free rent that you need or want. This is especially pertinent if other commercial spaces in the premises are vacant and have been so for some time. Aim for at least one month of free rent for each year of your initial or lease renewal term. But remember to begin your negotiations at more than that. If you begin your negotiations at five month’s free rent, you may be counteroffered three months of free rent.
Negotiate Half Rent Free: Suppose you want seven months of free minimum rent but the landlord will give you only three months free. Rather than concede your position, you might counter propose that months 4, 5, 6, and 7 are half rent free; that is that you pay only half the agreed-upon monthly rent. When renewing your lease, you will have more history on your side — you will have a track record of paying your rent on time– so you can easily ask for more.
Cashing in Your Free Rent: You may find it necessary to raise capital at some time in your business. If you have negotiated a free rent period for your lease agreement or your lease renewal, it may be possible for you to exchange that free rent for cash. Mind you, there is often a price to be paid! For example, if your rent is $3,000 per month and you have five months of free rent spread out throughout the lease term, the cash value is $15,000. However, because this means an outlay of cash for the landlord, he or she may want you to discount this cash value by up to 20 percent. You will have to weigh the pros and cons of your particular situation to determine if cashing in free rent minus a discount for the landlord still makes sense for you and your business.
Be Observant: If your lease is coming up for renewal and you see signage on the outside of the building offering landlord-supplied inducement packages for new tenants, speak up! As an existing tenant and proven customer, you should qualify for these same – or even better – inducement packages.