Successful Lease Negotiations Address More Than Rent

This is a story about Frank. You would like Frank. A man with a passion and the courage to start a business based on his passion. Frank opened a small tennis shop in Los Angeles in a redeveloped shopping center I managed that promised to be the new commercial heart of his underserved submarket. The center was going to have big name, powerful anchor tenants and was sure to draw great traffic to his store, and Frank felt the high rent – a new high watermark for his submarket – was worth it.

Because of the developer’s skill in creating this exciting new shopping center, Frank was anxious to get on board and signed a lease that – typical of shop leases – called for rent to start the sooner of 60 days after possession or when he opened for business. Having saved his money to open this store, he jumped into action and had his store open before the 60 days was up. The catch was, his store was open before two of the anchor tenants were built-out and open, including the one two doors down from his shop.

Frank’s tennis shop was out of business in four months. What a shame; a tragedy, really for Frank.

New or changing shopping centers are a potential mine field for shop tenants in these slippery situations. After all, the rent structure for shop space reflects the value created by the potential of the center when it is fully up and running. Negotiate these terms up front so you don’t have to fight for them when your back is against the wall:

• Negotiate free, reduced, or percentage-only rent until specified (or all) anchor tenants are open for business.

• Negotiate reduced rents if one or more specified anchors go dark. While this may meet with resistance from the landlord, it is prudent to ask, since the presence of the specified anchor(s) in the center is to a significant extent what gave the center commercial value in the first place.

• Negotiate reduced rent for shop space vacancy thresholds exceeded in your section of the shopping center. How many food shop clusters in neighborhood centers have we seen with three or four “for lease” signs in the windows in the past couple of years?

• If you lease space in a center undergoing or planning capital upgrades or remodeling, ask the landlord to “put his money where his mouth is” and negotiate reversion to lower or free rent if the work doesn’t commence or isn’t completed by dates promised by the landlord when you negotiated your tenancy in the first place.

Don’t end up like Frank. You can acknowledge the value of your retail space by paying the market rent, but insist the landlord recognize when that value – and your ability to pay – is diminished by dark space in your property.