A Vital Strategic Consideration

Over the years, I’ve had many clients ask why we advocate requesting a full set of economic terms from the landlord, including a tenant improvement allowance, even when they don’t anticipate doing any work in the space.

The answer is simple: to negotiate the most favorable deal, we first need to understand the full value the landlord is willing to offer.

Office leases consist of a basket of economic considerations, including rent, free rent, operating expenses, taxes, tenant improvements and even leasing commissions.

Failing to require the landlord to address any one of these key financial components can result in lost value.

While the economic variables in a lease are not equally weighted, they all matter. A landlord willing to provide a $100 per square foot tenant improvement allowance on a 10-year lease may not, for example, be willing to reduce the rent by $10 per square foot per year if the deal can be completed with no tenant improvement contribution.

But a tenant who doesn’t need the allowance should still capture as much of that value as possible elsewhere in the transaction. It is a real and material economic consideration.

Ultimately, tenants should structure their negotiation around the landlord’s net effective rent, or NER. NER measures the economics of the lease after accounting for concessions and other deal costs. Understanding the NER produced by the full spectrum of variables allows you to negotiate toward a similar economic outcome while moving the component parts around.

Maybe you don’t need a tenant improvement allowance. Fine. Negotiate to convert as much of that value as possible into additional free rent, a reduction in the face rate, or another concession that matters to you.

Every great negotiation begins with a clear understanding of the full consideration the other side is willing to offer.