Lease Negotiations: Knowing When You Have the Upper Hand as a Landlord
I want to take a quick second to talk about how negotiation is a crucial aspect of investing in commercial real estate, and how understanding when YOU have leverage as a Landlord is key.
In commercial real estate, we negotiate pretty much everything. How much we’ll pay for a property, how much rent we charge our tenants, how much we pay our landscapers, garbage removers etc.
Everything comes down to a negotiation.
That’s why it’s so important for Landlords to understand when they have the upper-hand in negotiations, as you’ll see in this real-life example.
We own a retail center in Fayetteville, NC where we recently leased space to the Army, Navy and Marines recruiting stations for 5-years a piece. Government-backed tenants are great to have because you can always count on their rent coming in on-time and you rarely, if ever, hear from them.
To move in, the government re-located from a neighboring property and spent nearly $700k renovating the spaces to their exact specifications. Big financial commitment for 6,600 sqft. We negotiated with them to pay $29/foot, plus CAM charges.
I bring this up because prior to the Army, Navy and Marines moving in, the Air Force was already a tenant of ours. At the time, they were paying $19/foot, plus CAM charges.
Well don’t ya know, the Air Force’s lease expired at the end of March, 3/31/21, and they reached out to us about renewing their lease. Hell yea!
Here’s the part where Landlords understanding when they have the upper-hand comes in.
Because the other 3 military branches just moved in (and spent a ton of money in the process) we knew the Air Force wasn’t going anywhere. Not only would it be cost-prohibitive for them to re-locate to another location, but the government just proved their desire to be at our property.
So what did we do when the Air Force approached us about renewing at a 10% increase to what they were paying (which, if you remember, was $19/foot plus CAM charges)?
We said no thanks. Then we stayed silent for a few weeks.
“So what ended up happening, Dan?” I’m glad you asked.
What happened after a few weeks of radio silence on our end was the Air Force re-approached us asking that we submit a proposal for them to renew their lease. So we did. And guess what? They accepted it.
$30/foot, an extra $26,389 in base rent for the year compared to what they were paying. On top of that, the increase in rental income is worth nearly $330,000 in value. Homerun.
Negotiation comes down to a bunch of things, but sometimes it’s just a matter of using common sense and some context clues. Put yourself in the tenant’s shoes and ask, “What would I do if I were them?”
Anyway, that’s my story. If you’re interested in having us keep you in the loop for future direct-ownership investment opportunities click the link below to register.
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