Free rent is just one negotiable factor in a commercial lease, which my business partner and co-author, Jeff Grandfield, and I explain in our new book, Negotiating Commercial Leases & Renewals FOR DUMMIES. 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 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 who we negotiated for the first four years minimum to be rent free (on a 10-year lease term). For another tenant, we negotiated for 18 months free plus a $180,000 tenant allowance on a 10-year term. 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 commercial tenants:
Negotiate (Ask) for More Than You Expect to Get
Free rent is often the easiest concession 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 months of free rent, you may be counter-offered three months of free rent.
Negotiate Half Rent Free
Some landlords are very concerned with achieving certain rental rates on paper but have no problem making other concessions. Suppose you want seven months minimum of free 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, 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 $5,000 per month and you have five months of free rent, the cash value is $25,000. However, because exchanging your free rent for cash means an outlay of cash for your landlord, he or she may want you to discount this cash value by up to 20 percent, which would result in you receiving only $20,000. 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.
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.
Negotiating free rent can put your startup at an advantage by delaying the overhead costs that your business will incur during regular operations in the future. It could provide an enormous advantage for your fledgling small business and is an important consideration during your lease negotiations!
For a copy of our free CD, Leasing Do’s & Don’ts for Commercial Tenants, please e-mail your request to [email protected].