We’re diving into the intricacies of GASB 96, a significant standard that government entities need to adopt, now that following the implementation of GASB 87 has been implemented for some time.
For most companies, leases and operating costs are usually the second largest expense behind payroll. Yet, after the initial negotiation, companies often don’t keep track of their lease terms or obligations — and that can mean missed opportunities, overbilling and wasted time.
Because leases are such a big investment, the ability to negotiate or renegotiate a lease is a critical part of managing business expenses. Lease negotiation requires understanding lease components and their implications, and then using that information to negotiate the best lease terms for your business.
A great way to prepare for negotiating a new contract or renegotiating with current lessors is to review your existing lease portfolio. It can help you get a good grasp of your obligations under different leases, which lease terms benefit you (or not) and how much flexibility there may be for negotiation.
In this guide, we’ll look at three ways you can prepare for and effectively manage your next lease negotiation:
In general, negotiation plays a bigger role in commercial leases than in residential or consumer leases.
That’s because:
In addition, businesses are more likely to lease larger quantities of equipment, vehicles and other assets than a consumer would. Although these leases often require customized contracts based on individual companies’ needs, most commercial leases include some common terms and standard boilerplate language.
These terms and language might be negotiated at the beginning of a lease and then automatically inserted each time the contract renews, with little or no changes over time. However, there are a few factors that can help determine the flexibility and ability to negotiate lease terms.
The amount of flexibility you have to negotiate a commercial lease often depends on the circumstances. For instance, if it is close to the end of a lease term and your landlord wants you to renew, you may have an opportunity to renegotiate a lower cost or other favorable terms.
Other things that may affect your ability to negotiate include the size and value of the leased assets. For example, you may have some leverage to negotiate with prospective landlords if you are looking for:
The ability to negotiate a lease also depends on the flexibility of the property owner or provider. A landlord who is anxious to fill a vacancy may be willing to negotiate an incentive for you to lease, such as a generous Tenant Improvement Allowance (TIA) for customizing an office space to your needs.
Renegotiation of a lease in the middle of a lease term could be triggered by a hardship of some kind, such as a distressed market, a significant business disruption or even bankruptcy. In these cases, lessors may be more inclined to negotiate so that they get something rather than nothing.
For example, if you lease a large amount of square footage or a highly visible location in a mall or office building, the landlord may work with you on desirable lease terms to avoid having the space sit empty.
As the world recovered from Covid-19, corporate real estate planning became more complicated than ever. Businesses across all industries continue to be in cash-conservation mode, looking to cut costs and remain agile in response to economic uncertainties.
Now, many leases directly consider and may include:
Even more so, there is now an emphasis on “hoteling” — an office arrangement where employees don’t have assigned workstations and instead reserve or use available workspaces temporarily — as well as spaces created with collaboration in mind, such as huddle rooms, team neighborhoods, and social zones.
These may be incorporated through flexibility in space utilization clause, allowing for flexibility in the use of space, potentially permitting tenants to adjust the layout or configuration based on changing needs or social distancing requirements, or through a negotiated tenant improvement allowance to help offset the expenses associated with incorporating this new office needs.
The widespread effects of the COVID-19 pandemic had a strong impact on both lessees and lessors. On one hand, landlords whose properties were affected wanted to recover as much rent as they could. At the same time, many tenants were looking for some form of relief from their rent obligations and experienced some level of unoccupancy to their corporate real estate leased properties due to office closures. Still, nearly half (47%) of the companies paid full rent on unoccupied properties — and a small fraction (8%) paid no rent. Regardless, more than half the companies planned to ask landlords for some rent relief, such as application of their security deposit or a rent abatement, reduction or deferral.
Tenants have looked to their leases for clauses like force majeure, casualty or business interruption to save money on rent.
However, these clauses had not been commonly found to apply to COVID-19, given it was unusual to include specific language about a pandemic in lease clauses before the pandemic. However, that is something that will continue to change in the future through lease negotiations.
Alternatively, some tenants and landlords worked together during the pandemic on lease negotiations to ensure that both could stay in business during and after the crisis, and the landlord could continue to collect revenue from assets.
Your existing leases are a valuable source of information that can help your business negotiate new leases or renegotiate existing agreements.
Any lease that has been customized to your business needs provides an opportunity for you to identify lease language that has worked in your favor. Moving forward, you can choose to establish that language as a standard to use in new leases or renewal negotiations.
Conversely, if existing leases contain language that has not worked well for your business, you can try to avoid those terms in new contracts or renegotiate them at the time of lease renewal.
Naturally, you want to know what your rent and other lease payments are — but you also want a clear picture of what you are getting for the money. For example:
In addition, you should look at your leases to determine whether your termination rights and renewal terms are favorable to your business. How easy is it for you to get in or out of leased spaces?
Lastly, you should know where you are in your current lease terms, to be aware of automatic renewals, deadlines you must act on and possible opportunities to renegotiate before you renew.
For instance:
With this kind of visibility into the details of your current leases, you are in a position to evaluate whether there is language you would like to renegotiate when a lease renews — or language you want to incorporate or avoid when entering into a new contract.
Manually searching through every lease for specific clauses and language is an incredibly time-consuming and cumbersome task. (Just ask anyone who has implemented lease accounting standards — ASC 842, IFRS 16, GASB 87.)
But by utilizing lease accounting and management technology, you can more clearly identify all your lease obligations and crucial lease language, which enables you to keep track of current financial obligations and critical dates, plus important details to help with future lease negotiations.
For example, lease management software can help you identify if you paid for space you did not use — or overpaid for services such as cleaning or utilities. Armed with that information, you can look out for those issues in new leases or address them in current leases prior to renewal.
With all your leases and important terms entered into a centralized system of record, you can easily group information, generate reports and view a complete picture of your lease portfolio. You can also view individual lease details and cut data by region, landlord/lessor, expiration dates and other criteria.
Creating a digital portfolio of abstracted leases lets you search for both ideal and low-performing lease language to:
The lease management system you choose should allow you to bookmark specific language and establish it as a standard that you want to repeat in the future, such as:
Further, a robust lease accounting system such as Visual Lease enables you to search for and identify automatic renewals on leases that you negotiated long ago, which gives you the opportunity to easily determine whether the terms are still favorable or if they need to be renegotiated.
Engaging with professionals, such as real estate brokers or lawyers, can help you make smarter, more informed decisions about your leases. Lease experts can provide sound advice and help you better interpret and understand lease language, the current market conditions and your overall negotiation options.
Brokers are not experts in lease documents and legality. However, they can provide insights about the marketplace to help you decide whether to invest in a particular lease. For instance:
A broker can perform a market analysis, which includes the typical pricing in a given area. In addition, brokers often know the lessors and are familiar with their business and reputation — added information that can be helpful to you as a potential lessee.
When you work with a real estate broker, they can help you better understand the current commercial real estate market and what is happening in neighboring communities.
For example, in the aftermath of a pandemic like COVID-19, a broker can tell you if there have been rising vacancies and falling rents in certain locations. Those are trends that may open the door to negotiating with owners who are eager to have their properties occupied and generating revenue.
The same is true for equipment, vehicles and other frequently leased assets. There, brokers can tell you if prices are down or new stock is not moving — possibly giving you an opportunity to negotiate a price or opt to buy while the market is soft.
Additionally, there are brokers who specialize in meeting different needs based on the health of a business and its goals. For instance, there are real estate brokers who help companies lease high-end spaces. There are also brokers who help companies during situations such as severe market downturns or bankruptcies.
Still, remember that brokers are not experts in the legalities of lease language. Therefore, you should consult with an attorney regarding any lease.
Before you commit to a lease — whether it is new, renewed or renegotiated — you should always work with an attorney. He or she can identify the high and low liability aspects of the lease and help make sure that you:
In lease negotiations, an attorney can ensure that a lease includes ideal language to protect your interests. This adds a level of refinement and enforceability that only a legal expert can provide.
Unlike a broker or other layperson, an attorney has the expertise to guide you through negotiations and manage complex lease language such as casualty and force majeure clauses. Just as you should always consult an attorney before signing a new contract, it is also important to have an attorney review the documents for lease renewals and renegotiations. Additionally, there may be times when it is appropriate to use an attorney to revisit previously negotiated boilerplate language.
For instance, when you work with the same landlord for a long period of time or a multiple-lease portfolio, you tend to negotiate some standard language and then update the lease as needed in areas such as:
Ideally, you can work with the same attorney who was involved in negotiating the original lease, who can compare the documents and redline any changes or additions. At the very least, a new attorney can review the lease to make sure your interests are protected and there are no red flags.
Negotiating a commercial lease is a complex process, and small oversights can lead to long-term financial consequences. Being aware of common mistakes can help businesses avoid costly mistakes and secure better lease terms:
A well-prepared negotiation strategy can significantly improve lease terms and provide financial benefits. Implementing these strategies can help businesses achieve the best possible outcomes during commercial lease discussions:
Get a head start on your negotiation power with a real estate lease accounting software. More than 1500 companies have used Visual Lease as their system of record for all leased real estate and equipment assets. Through proper lease management within one easy-to-use tool, you can simplify and automate lease information that you can leverage for more successful lease negotiations.
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