When leasing commercial real estate, one of the main factors to look at is the cost of that space. A company must analyze their financial situation to determine how much they can pay for space, and what they need to have for that money. One important idea a business should keep in mind when considering lease rates, and how to get more for less, is that leasing rates are just a part of commercial lease negotiations. When negotiating the terms of a lease, everything from going market prices to how well a specific tenant fits the landlord’s desires for a tenant should be considered. In other words, there is room to negotiate; therefore, the best place to start is often by determining an effective rental rate.

What is Effective Rental Rate

An effective rental rate is one that is negotiated based more on the benefits that both the landlord and tenant gain by entering into a lease, rather than by a specific dollar amount dictated by the landlord or even the commercial real estate market. While local lease rates can be seen as the starting point, a company can negotiate with landlords for a more financially affordable lease deal based on things like credit and leasing history, negotiation timing, how attractive the tenant is to the landlord, size of the tenant, and amount of space to be leased. Determining an effective rental rate involves skilled commercial lease negotiations; however, the end result should be a compromise in different areas that both parties agree to in order to sign a lease. A tenant may compromise on certain needs or requirements, while landlords typically compromise on the actual rent rate.

How Effective Rental Rates Are Determined

Landlords must still generate income from their buildings, regardless of any negotiation on rent. An important step before negotiating rent is attempting to determine what that landlord’s bottom line may be and to pre-plan based on that idea. To do this, a tenant and their representative must compare the differences between a landlord’s initial lease offer based on price per square foot, improvement allowances, and other financial issues.  Then there are subsequent counter offers to try and determine where a landlord may be flexible on rates and where they are not.

Through skillful negotiations, a tenant can work toward achieving the lowest rental rate possible, based on where they know there is flexibility, versus where the landlord will probably not budge. In doing so, landlords can obviously still achieve their need to cover building income needs, while the tenant can still gain benefits with improvements, free rent months, commissions, and more.

An effective rental rate on commercial real estate is one thing that a company and landlord alike can negotiate so the company can affordably occupy a desired space. By first attempting to determine the best way a tenant can get a landlord to negotiate, commercial lease negotiations can be fruitful and beneficial for both parties. The more power a tenant has in being a preferable tenant for that landlord, the more success they may have at affordably leasing the space they desire. This is a common technique used in negotiating commercial space; when successful, it gives a company the space they need and leaves the landlord with the most favorable tenant occupying their building!

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