I’ll start with an example of a real situation. Last year, I represented a digital marketing agency with a $9,500 per month budget that was in the market for about 2,000 Rentable Square Feet. They had outgrown their 800 Square Foot sublet space and needed a bullpen area for a staff of 6, a large conference room, and a team room. They wanted to upgrade to a class A building with a 24/7 lobby. Two of the owners commuted into Grand Central Station on the Metro-North Train, so a building near Grand Central Station was a plus.
My client was at the time subleasing in a Class B building and wanted to upgrade to an A building. Their $9,500/month budget for 2,000 Rentable Square Feet translated into $58/SF for 2,000 Rentable Square Feet. Prevailing rents for A buildings near Grand Central Station were $60.00-$75.00/SF.
Respecting the budget was critical, and so was getting the 2,000 Rentable Square Feet, which was the minimum size they required.
I showed my client nine spaces in 4 buildings within a few blocks of Grand Central Station. One of the spaces was a prebuilt office with concrete floors and exposed ceilings. The area was 1,978 Square Feet with a low loss factor. It was on a high floor and had lots of windows. The asking rent was $64/SF ($10,549/month). My client authorized me to submit the following proposal:
- $54.60/SF base rent ($9,000/month)
- Space to be delivered in “as is” condition.
- Rent payments to begin upon lease execution (no free rent).
- Lease term of 10 years.
- Three months of security deposit.
- Annual lease escalations of 2% plus the tenant’s proportionate share of real estate tax increases.
Included with the above offer were the previous two years of my client’s Form 1120 U.S. Income Tax Returns. These returns showed strong growth in revenue and profitability. A reference letter from their sublessor was also included.
After several offers and counteroffers, an agreement was reached on business terms, and the terms incorporated a base rent of $9,600/month ($58.24/SF).
We succeeded in negotiating the base rent from $64/SF to $58.24/SF by taking the below approach:
- Accepting the space in “as is” condition. Don’t ask the owner to improve the premises. Avoiding build-out costs will allow the landlord to show flexibility on the rent. Find a space that has a functional layout.
- Not asking the landlord for any free rent. Sometimes landlords provide some free rent so new tenants can avoid double rent. Try to time your move to minimize the risk of double rent on the space you are leaving.
- Offering to start the lease immediately. This sent a signal to the landlord that their vacant space would start generating rent almost immediately. This acted as an inducement for the landlord to show flexibility on the base rent.
- Offering the landlord a long-term lease. A long-term tenancy means that your landlord will not incur the cost of reletting your space for many years.
The tenant financials that were sent to the landlord along with the offer showed revenue growth and profitability. Landlords generally request to view the last two years of corporate tax returns. It can be beneficial to provide a reference letter from previous landlords.
Don’t worry about outgrowing a space. Landlords usually go out of their way to accommodate existing tenants seeking expansion space.