You've just completed negotiations on your commercial lease with your landlord. It's now time to go to lunch, celebrate the deal and refocus on running your business. Your landlord has assured you that you got a "great rent." And the lease comps he's provided certainly confirm this. But how did you really do with these negotiations? Your landlord wants you to think you did great. Is that true? Consider the following.
Review the complete lease comps. Make sure you review all the lease comps for similar size and quality building space in your market. Landlords have a "bad habit" of showing you only those lease comps they would like you to review. However, you should be most interested in all lease deals for the past 12 months. If you haven't paid close attention to a thorough lease comp survey in your market, you may be paying the landlord more rent than the comps support. If you lease 5,000 SF over a 60-month term and you're $10/SF over market, your gift to your landlord: $30,000.
Project operating costs. This is a great source of hidden revenue for most landlords. When you review the expenses portion of your lease, make sure you ask for the landlord's actual project operating costs for the preceding 12 months and his estimated project operating costs for the next 12 months. Are they realistic? How do they compare with comparable buildings in your market? What are the legitimate expenses and what are the other areas known as "landlord add-ons?" These might include property management fees, building capital improvement programs, etc. If you lease 5,000 square feet for five years and are paying an additional $0.05 per square foot in expenses per month that you shouldn't be paying, your gift to your landlord: $15,000.
Refurbishment Allowance. Most landlords don't want you to know this, however, if you are leasing commercial space for more than five years, at the end of the fifth year, most landlords will provide up to $10 dollars per square foot of "refurbishment allowance" if asked. This is for the purpose of new carpet, new paint, etc. Any unused portion of this refurbishment allowance is typically used as an offset against future base rent. If you didn't ask for any refurbishment allowance at the end of five years, your gift to your landlord: $30,000.
Rent Adjustment. Most commercial or industrial leases today have an annual adjustment of two to three percent of the base rent. If you agree to a four percent per annum increase instead of a three percent increase, for a 5,000-square-foot space with a rental rate of $1.90 per square foot, your gift to your landlord: $12,868.
Text exclusion regarding a building sale. Office and industrial buildings are selling today at a firecracker pace with unprecedented values. If you don't have a tax exclusion in your lease, then when your landlord sells the building, what happens to you? Let's say your landlord bought his 30,000 square foot building for $2.5 million dollars three years ago. Today he can sell the building for $6.75 million dollars. The annual real estate tax bill will go from approximately $45,000 dollars to $57,500 dollars. If you're leasing 5,000 feet in this 30,000-foot building, then you are responsible for approximately 17 percent of this tax increase. Your gift to your landlord: $3,825.
Expansion Space. Most landlords would love to have the tenant expand but they also want to have the right to set a new rent, which is consistent with their view of market rent. If you signed an office lease one year ago at a rental rate of $2.15 per square foot plus utilities, that rental rate for the same space today is $2.50 per square foot plus utilities. Therefore, whenever you have a provision in your lease regarding expansion, make sure you address how the base rent will be calculated. From the tenant's perspective, you would prefer the rent for your expansion space be at the same rate as your original rental space as described in the master lease. (The landlord may have some grounds to argue this point if the expansion occurs past the halfway mark of your lease term.) However, before the halfway mark of your lease, if you need to expand by 2,000 SF and don't have this "same rent" provision in your lease, your gift to your landlord: $32,600.

The above points are not meant to be all-inclusive and perhaps you may be aware of some of these techniques. Still, be careful. In our example, your "landlord gifts" totaled more than $124,000. The next time you sit across the negotiating table from your landlord and he flashes you that "aw shucks" toothy grin, remember he's preparing to reach into your pocket for more of your hard earned cash.

Bill Driscoll has been a commercial leasing agent for CB Richard Ellis for the past 24 years. He has negotiated more than 2 million square feet of office and industrial leases and sold more than 630 acres of commercial land. During his first 10 years, Driscoll represented large land lots. He has also been the top sales person for the Carlsbad office on five different occasions. He can be reached at [email protected].