Over the summer I read the book “Never Split the Difference” by Chris Voss. In his book, Chris outlines the psychology of negotiating and provides a step-by-step guide in how to get the most out of your negotiations for yourself. While I found following that process great when it came to selling my truck, I quickly abandoned it when it came to negotiating our lease. Our experience in negotiating our lease and leasehold improvements taught us a lot about being agile and creative as small business owners, as well as the importance of building relationships.
Commercial Real Estate and Leasehold Improvements
Something we learned quickly when searching for our space was that commercial real estate is much different from residential real estate. There are no true-rules when it comes to renting pricing, term length, or responsibilities in regard to leasehold improvements. Let’s take 2 units from 2 separate landlords, A and B; they’re the same size, same relative location, and both empty shells. Unit A’s rent may be half the price of B, however, the landlord of B is willing to cover the cost of the leasehold improvements to the exact specifications of the tenant. Most commercial real estate deals will differ from space to space.
This presented a challenge for us as we were new to this world and had no real template or standards to follow. However, this allowed for the opportunity to get creative and shape a deal that worked best for BOTH us and our landlord.
Negotiating Our Lease
One of the reasons we started Partners in Practice was to give readers valuable information that they can take and apply to their own life and business. With that being said, we’ve decided to be transparent in providing information from our deal.
When it came to the actual lease agreement, things were agreed upon fairly quickly. The listed rent price was more than fair, and everyone was comfortable with a 5-year term. The more consuming part of our deal came with negotiating the leasehold improvements.
Running the Numbers
The landlord of our space happened to be a reputable home builder in the area and offered his services in contracting the space. In fact, he had contracted all of the units in our building so we were able to see firsthand the quality of his work. We would only need to be involved with preparing the layout, and some aesthetic decisions (ie. wall and floor colours). Everything else would be handled by him. After getting a mock-up of the layout for space, the quote we received from him was $98,800.
Keep in mind that we would be using a loan to pay for it. Therefore, it would cost us a lot more than what was quoted.
If we took a loan of $98,800 at a rate of 2.95% on a term of 10 years (5-year lease term + 5-year option). The total repayment amount including interest would is $114,208.99. The interest payments alone would be $15,408.99.
We knew that with starting a new business, cash-flow would be very sensitive. With that repayment figure being daunting to us, we needed to find a way to save. In order for us to protect that cash-flow, we needed to get creative.
Getting Creative in Negotiating Our Lease
We needed to get that total repayment amount down in order to decrease our exposure to financial risk. We had set up a meeting with the landlord to finalize the deal. So, we prepared a few solutions that still got him paid and would decrease our debt load:
- Have the landlord cover the upfront cost of the build, which we would pay back over time with interest
- Factor the leasehold improvement amount into our rent over the term
- Break the quote into multiple installments. This would allow us to take out a smaller loan and would decrease our monthly payments for the first 6 months to a year
In the end, we worked out a deal that combined the last 2 options above. We paid him half of the total upfront ($50,000), and he would include the remaining half into our rent over the 5-year term. We were happy with how the negotiation went and how agreeable everyone was to the terms.
Running the Numbers Part 2
Now that we only had to pay half up front, this decreased the amount we had to borrow originally. Yes, we still need to pay the remaining half, but that would be interest-free over the 5 years. So now let’s rework those numbers and see the total cost to us for this deal.
A $50,000 loan at 2.95% on a 10-year term = $57,798.07 with interest totalling $7,978.07. We still need to add the remaining $50K for a total of $107,798.07.
Because of this deal, right away we save $6,410.92 which can go towards other expenses required to get started. While it may not seem like that much of savings, $6,500 saved is $6,500 saved..
Negotiating As a Means of Building Relationships
Before going into these meetings, we prepared with only ourselves in mind; what was best for OUR business. While of course, you need to look after yourself, there are always 2 parties in a negotiation. In our cases, we needed to decrease our debt load, and our landlord still needed to get compensated for the work he was going to do. If we walked into our negotiation and flat out said “lower your quote or we’re walking away” it’s unlikely we would have come out with a deal. Instead, we expressed our needs and acknowledged his. In the end, we amicably landed on a deal that met everyone’s needs.
Getting that deal done aside, we now feel that our relationship as landlord and tenant are stronger having gone through this. I believe that us working together as a team to come to an agreement will prove to be much more productive than one side strong arm-ing the other into submission. We entered into a minimum 5-year business relationship, and we’re glad we were able to start on a good note.
The Juicy Goods on Negotiating
- First time experiences can be a great exercise for tapping into creativity. Having a lack of bias and an understanding of theoretical norms is a strength that needs to be recognized
- Use negotiations as an opportunity to work through a problem together, as opposed to focusing exclusively on your own needs. If you find yourself in a negotiation with a party that has no consideration for your needs, should you stay in business with that party at all?
- When faced with a problem, remember there is always a solution. Don’t jump to conclusions before you’ve explored all of your options. Think outside the box and put aside any fear of judgement or rejection.