Lease Rates are Not What They Seem

When reviewing the commercial office lease rates advertised by Landlords, we are often struck by the disparity between these advertised rates and the “Net, Effective” rates typically achieved through our lease negotiations.    Why do the advertised lease rates seem so high – in this down market – when a commercial Tenant can often achieve far better terms?

There are several reasons.   Landlords desperately need to keep lease rates as high as possible because these rates impact the Net Operating Income (“NOI”) generated by a building.  NOI is utilized by commercial appraisers and lenders to determine a building’s value and its loan to value ratio.   If lease rates fall, the building valuation falls and the bank may be unwilling to refinance the property without a significant injection of additional capital by the building’s owner.   This can cause the owner to lose the property.

In addition, Owners don’t want Tenants in a building to learn of discounted lease rates provided to other building tenants as leases are renewed, because this can quickly lead to a declining lease rate death spiral. And for similar reasons, they don’t want lower lease rates reported on the commercial databases because it will negatively impact the expectations of prospective Tenants.

Landlords desperately want to attract new Tenants and retain their existing Tenant base.  But, how can they do this in a down market while still maintaining their lease rates?   The Landlords with access to capital play a game of offering unadvertised lease concessions including FREE RENT, significant Tenant Improvement Allowances, Moving Allowances and/or other upfront incentives.

These concessions are rarely advertised and are only secured via the lease negotiation process, often after multiple rounds of negotiations and using leverage created by the Tenant’s commercial brokerage team.  In a recent lease renewal negotiation, Guidance achieved for a client eight months of free rent on a five (5) year lease renewal.   The Landlord absorbed a significant reduction in rental income up front to retain our client as a Tenant and to present higher lease rates throughout the lease term.  For our client, the Net, Effective, Lease Rate over the lease term was very attractive.

To achieve the best rates and terms, it’s crucial that your commercial broker develop maximum leverage when negotiating a new lease or lease renewal.  By understanding as much as possible about the market and the Landlord’s motivations you will be in the best position to achieve an aggressive deal.

Information is Power and Your Tenancy is Valuable!  Guidance Corporate Realty Advisors knows how to maximize leverage through a systematic, battle-tested approach.  Please contact us to discuss your situation.