Top 5 Tips to Reduce Your Rent

Posted on March 1, 2014 in Business Transactions

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Arm yourself with the facts, and get those fixed costs under control.

For many small businesses, rent is the single largest expense (outside of payroll) they face on a regular basis. So, when times are tight, it’s no surprise that business owners consider rent reduction as a way to reduce their operating costs. Like other negotiations, lease renegotiations are a delicate dance. Getting what you want takes a combination of timing, competitive intelligence (as in background information), knowing your bottom line and recognizing all of the costs of change.

For example, Joanne thought of renegotiating her lease when her business hit a brick wall. Sales were stagnant, and possible sources of investment capital had dried up with the autumn leaves. At that point, she approached her landlord and asked for a rent reduction. The landlord shrugged his shoulders. “Things are tough all over,” he said. “You signed a five-year lease. You have three years left. I can’t help you.”

Where did Joanne go wrong? For one, she went to her landlord “cap in hand.” She had no leverage, no bargaining chips–she just wanted a lower rent. In many cities, landlords ask for personal guarantys from business owners, so even if the company goes out of business, landlords can still collect from the owners. Joanne also went to the landlord when there was a substantial amount of time left on her lease: three years (out of five). As a result, the landlord had no immediate worry that the space would become vacant (and that he might lose the rental income).

Renegotiation doesn’t have to be tricky. With proper due diligence, a lease renegotiation can go smoothly. Here are the top five issues you’ll want to think about:

  1. Where is your business now? Do you have a clear sense of your financials and how much you can afford? How is your company’s financial health considering the economic conditions? Does your lease have built-in options–such as the right to sublet part of your space–that could provide you with some breathing room?
  2. Where is your business going? Rather than merely react to immediate economic conditions, as Joanne did, you’ll want to be clear on your business plans for the next two, three and five years. Where do you want to take your company? Does your current space fit those needs? If not, this could provide an opportunity to trade up (or down) if you’re willing to make a time commitment to the new space.
  3. How much does your space really cost? Look beyond just the rent. What do you pay for utilities? Garbage removal? Taxes? Are you getting the maximum benefit from your space? Weigh these costs against all of the costs of relocating to see whether you’d truly be saving money if you moved. A move can be very disruptive for employees (especially if you go to a different part of town), customers (Is your new location as convenient for them?) and your internal operations. (Does computer networking ever go smoothly?)
  4. How’s the neighborhood? What’s going on with your neighborhood and nearby properties? Do you know the vacancy rates? Has the landlord kept up with building maintenance? This information can provide the “brass tacks” of your negotiation–the hard data for why the space doesn’t have the same value it did when you first signed the lease.
  5. Are you going it alone? Don’t. You have enough on your plate. One of the biggest mistakes small-business owners make is to treat lease negotiations as part of the usual course of business. It isn’t. Develop a team of advisors to give you the ammunition you need to make the right decisions. These include your financial adviser, banker, broker and real estate lawyer. They’ll help you determine what you need and where you can afford to be flexible.

How does this play out? Follow Janine’s example, not Joanne’s. Janine started to see the writing on the wall when major tenants in the building didn’t renew their leases and moved out. Her broker told her that rents in the area were falling. Janine had a good handle on her finances, thanks to consulting with her accountant, and knew that she could make it through the tough times as long as she could control her fixed costs.

Janine approached the landlord with 14 months left on her lease, armed with the statistics on vacancy rates. Concerned about having the space vacant, the landlord was willing to grant rent concessions, provided Janine agreed to extend the length of her lease. Both sides walked away happy. You can, too.

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