In general your leverage in a negotiation is grounded in your next best option. There are, however, several key factors that determine your leverage in any given negotiation.
We find that these factors fall into three groups of variables: the market, your business, and your search. Before we get into those, though, it can be helpful to understand your adversary…the landlord.
The Business of Being a Landlord
Understanding the needs and desires of the other side of a negotiation is critical to finding common ground and understanding where you may have leverage, or an ability to give in an area to get what you want in another.
Most landlords use debt to purchase an asset and get their business off the ground. They are trying to find tenants to provide at least enough cash flow via rent to pay their bank note and the ongoing expenses of the property. Usually any profit comes on the final 10-20% of space that they rent.
Every time they have to find new tenants there is a transactional cost for them, and exposure to the risk of the real estate market. Because leases are such strong contracts, having signed leases in place on their space is very valuable. The longer the lease term at any given point, and the better the credit of the tenant, the more valuable that lease is on their balance sheet.
Landlords improve their business returns over time by being able to refinance their assets when commercial real estate rates are attractive. Their ability to refinance and achieve those attractive rates are determined largely by the risk of their tenant mix.
Understand Your Market Context
The state of the geographic real estate market you are searching in is very important to consider as you approach negotiations. Is it a landlord friendly market with low vacancies, low costs of capital, and lots of tenants searching for space? Or are there high vacancy rates that are stressing landlords financially?
These variables are typically the most impactful on your leverage in any given negotiation and unfortunately are some of the hardest to effect – they often are what they are at any point in time.
That said, there are a couple of common strategies used to maximize leverage in this category.
The first is time: being willing and able to wait for the market to become more favorable.
The second is expanding your search to include markets with more favorable conditions. This relies on significant regional differences in real estate markets across your search area.
If you have a market picked out and you’d like to open in the next year, you will likely need to accept the hand you have been dealt and focus on other areas to improve your leverage.
What Is Your Risk Profile as a Tenant?
The second category has to do with how things are looking on your side of the table.
One of the primary proof points that increases leverage in this category is a history of successful business operation.
Multiple-location groups that have been in business for many years will have more leverage with landlords than first-time business owners. There is less risk to the landlord with a proven business model.
So what can you do as a potential first-time business owner to increase your leverage in a real estate negotiation?
Firstly, maintain a clean credit history. The only backstop a landlord has with a new business owner is a personal guarantee on the lease. If you have a history of credit issues they may not feel protected by that guarantee and may be unwilling to take risks in other areas of the deal if they will do the deal at all.
Secondly, pick a business model that is proven within your practice type. “Bread and butter” practices have track records of success because their business models are well tested and well understood. Trying to incorporate multiple specialties or a unique model into a start-up practice can be a red flag that there is additional risk to the landlord.
Lastly, be reasonable with your space requirement (and the expense that goes along with it). Figuring out the balance between the reduced cost of a smaller space and the increased business potential of a larger space can be tricky.
Remember, your first priority is to prove yourself as a credit-worthy practice owner. Your leverage when negotiating for an expansion will be higher having found success in a smaller footprint at first. If you struggle or fail by going too big you shoot yourself in the foot going forward.
Your Real Estate Search
The last category is how you approach your specific real estate search.
As mentioned at the beginning your leverage in a negotiation is grounded largely by your next best option. If you don’t have a backup option, you unfortunately significantly limit your leverage.
Using an experienced broker who can set expectations and goals based on prevailing market conditions and being realistic about how you stack up risk/reward-wise compared to other tenant options landlords have will lead you to more productive negotiations and hopefully multiple viable options.
Knowing what real estate “features” (things like parking, signage, visibility, location) you can be flexible on, and what you can’t, help as well.
With multiple viable options on the table you will be able to find where you have the most leverage to get the best deal for you.
