Commercial Tenant - Need help negotiating and NNN
I am a potential tenant looking to rent about 6,000sf of office in a high-end building in well known area in SoCal.

Rent is about $5.50/sf (un-negotiated)

NNN expenses are about $1.85 (34% of RSF price)

I am waiting to hear if this NNN charge is variable (meaning adjusted to actual cost at end of year) or fixed. Either way, this seems REALLY high but what the hell do I know.

The LL is giving rent half off for the first 2 years, then adding that back in in the remaining 3. I am fine with that and understand he is trying to inflate the value of the property.

I am going to ask for 3 months for free rent because I don't need the amount of TI he is offering. I am going to ask for another 3 months to reduce the SF price to get it down lower.

Are there any better ways to negotiate getting the price down? We are well capitalized so I don't mind paying high rent some months if it means the net amount spent is less. I just want to get a good deal for the both of us. I think his price is pretty high even for the area and I want to get it lower.

Also, he is asking for a 3.5% annual increase. This obviously is a compounding figure. What happens if I stay 10 years? Would it be abnormal to ask for a fixed monthly increase instead of percent? I also intend on asking him for a 3.0% as it's more inline with inflation.

If it helps, I know the current tenant is moving into another unit in the building and there are no other prospective tenants (especially not now with the virus). We are talking about commercial office space in Malibu, there isn't exactly a huge supply of tenants waiting to buy.

This is a 3.3M lease which is by far the biggest I have ever done. Any advice on the NNN, annual increase, or on lowering the net cost of rent would be appreciated.
[{"id": "fm6g9bk", "text": "$5.50/SF/Yr or $5.50/SF/Month? \nI'm assuming the latter since it's CA.\nWhat does the NNN cover? Janitorial, electric, etc.?", "replies": [{"id": "fm6guyq", "text": "Yeah per month. The NNN covers everything and I am trying to get confirmation on utilities. I am PRETTY sure utils. are included but I am double checking.  \n\n\nKeep in mind that like rent, utils are inflated here too. Probably 30 cents per KWh.", "replies": [{"id": "fm6ijbe", "text": "Are you a broker? Or do you have a broker repping you? Shouldn't cost you anything to hire one, seeing as how they're typically paid by the Landlord. \nAlthough it may help your case to get the lowest rent possible if LL doesnt have to pay lease commissions to a co-broker. Especially since it's such a high GLV. \n\nDefinitely try for as much free rent to start as possible. The current office market is obviously hurting for new tenants during this craziness.  Use the fact that you don't need much TIA as a negotiating factor. Tell them in lieu of it, you want the free rent. \nBase your Rent commencement date off the delivery date. Dont commit to a fixed date or base it off the signature date, just incase COVID continues to screw stuff up. \n\nAlso nail down what's exactly included in that TICAM figure. You dont need any surprises. \n\nAs far as the rent increases. 3.5% is ridiculous.  3.0% is reasonable, maybe even try for 2.5%. Cant hurt to try. \n\nDefinitely ask for at least one, five year option to renew. Its tricky whether to know if you should lock in a fixed increase or to leave it negotiable at time of renewal. I'm not familiar with the SoCal market. But it may make sense to have a negotiable option and just include some sort of cap so that it can't exceed a 3.0% increase over the expiring year. If the landlord would go for that. \n\nHope this helps.\n\n*Edit: Co-broker,  not co-worker", "replies": [{"id": "fm6rodf", "text": "Great! It sounds like the plays are:\n\nGet as much free rent as possible by leveraging TI.  \nGet the annual increase down to 3% or less.   \nNegotiate hard for free rent based on COVID, wait it out.  \nPlan all terms around uncertainty, including delivery and COVID.  \n\n\nThank you!", "replies": [], "depth": 4}], "depth": 3}, {"id": "fm6r95b", "text": "So you think $66/SF/Y is a good deal that you want to lockin before the market crashes?", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "fm6hejr", "text": "As a LL, NNN charges are more important to get from the tenants than base rent. This is an area that I won't negotiate with tenants unless I have to which is pretty rare. Sometimes, they'll put caps on the growth of the NNNs, but I don't like that either because they are what they are. These are generally fixed costs of running the building or RE Taxes or Insurance premiums. All of these categories I want to have reimbursed by tenants as much as possible.\n\nTo the extent that the NNN charges do not capture these costs, that is something that eats deeply into my cash flow. Trading TIs for rent is very much on the table though. That is a good route to pursue. You can also ask for rent bumps to come every 3 or 5 years instead of annually. \n\nMalibu is obviously a tough market, but if you lay down on the NNNs and try to deal in other areas, there's a good chance you can get what you need done.", "replies": [{"id": "fm6ir4o", "text": "Thank you. I agree on the NNN's but I need to find out if its a reimbursement or a profit center. My hope is that we pay the true cost of the NNN's by settling it up at the end of the year instead paying some arbitrary number. If it's the former then it shouldn't be subject to increases etc. What do you think?  \n\n\nLet's say the LL gives me one free month of rent a year, does that devalue the building more or less than if the price per SF was lowered throughout the entire term of the lease? If more, is it better to negotiate to get the free rent in the current year than sporadically throughout the term?", "replies": [{"id": "fm6sce9", "text": "I\u2019ve been a commercial property manager for a very long time. NNN is never a profit center. It is simply a reimbursement to the LL for the actual expenses of running the building. The Lease should detail what these include/exclude but most notably taxes, insurance and general repair and maintenance items. The expenses are estimated at the beginning of the year (often treated like an escrow so the LL has some funds to pay the expenses during the year). That estimate is based off the budget and then reconciled after that year is closed out. You may owe, you may get a credit. Some LL will review mid year as well. \n\nThe only exception would be the management fee which is usually a standard percentage of revenue. That\u2019s the LL profit and should be a clear line item. Ask for the breakdown. The percentage might vary in your state but usually 4\u20136% of gross revenue. \nI agree using a broker to rep your negotiation. You are an expert at whatever it is you do, not Lease negotiations. A reputable and responsible LL is more interested in getting a tenant that will fulfill the Lease terms and be a good tenant than trying to screw them over. \n If the NNN were a fixed amount it would either be called a flat fee or similar or factored into the base rent and you would then be in a gross lease. \n\nThe cost of running a building increases just like everything else -taxes go up, utilities go up, wear and tear on improvements, landscaping contractors charge more. Those costs have to be absorbed they NNN so that is why increases are normal. \n\nHope this helps.", "replies": [{"id": "fm6u6re", "text": "It does. The I will get a breakdown. The 3.5% annual increase is currently being applied to the NNN AND to the rent. Thank you for the reply I will get more info.", "replies": [{"id": "fm6uczf", "text": "You\u2019re welcome!", "replies": [], "depth": 5}], "depth": 4}, {"id": "fm6yb4n", "text": "Well said.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "fm6j3f5", "text": "Depends on the credit of the landlord. Does he own it outright or is there a mortgage? Free standing building or in a shopping center. If it is rodeo drive or other high street retail they are fine keeping it vacant. If it is melrose or Hollywood or something that is not high street they are willing to negotiate. \n\nAnd only 5 years, that is shit. What about options? Most retail leases are longer term but you don\u2019t want to lock in what is the top of the market. Don\u2019t know if you know this or not but retail is rightly fucked and most landlords would kill for someone to pay rent right now because they bought at the top of the market to and are about to get a rude awakening. Planning dept are all closed to, so getting any kind of permits is not possible for the next probably 4 months, so why pay for space you cannot use? \n\nBasically unless this is the perfect space with must have access, I would walk and wait two weeks. Who knows, you tenant may have cold feet here once the extent of the shit we are in is revealed.", "replies": [{"id": "fm6jwwt", "text": "It's office space. Prime office space, however.   \n\n\nI wouldn't move forward without an option.  \n\n\nI agree on waiting but I also think its in my best interest to negotiate now.", "replies": [{"id": "fm6lydg", "text": "Brookfield or Douglas Emmet?", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "fm6ncn6", "text": "You need to get a broker. Thats your best bet. Landlord pays them, nothing for you to lose.\n\nIf landlord has a broker you wont save on fee's because their fee structure will get them paying the broker for both halfs of the fee", "replies": [], "depth": 1}, {"id": "fm6odbm", "text": "Beyond anything else that others have said, I would also recommend trying to build in a RE Tax cap so that you will not be responsible for NNN on reassessed valuation\u2014only actual, annual increases/decreases or 2% annual increases, whichever is less.", "replies": [], "depth": 1}, {"id": "fm6pw86", "text": "Not in SoCal, but Silicon Valley, which is a similar market in terms of demand and high end office space.\n\n3% annual increases are still the standard unless you don't have good credit.  \n\n2-3 months free on a 5 year lease is also pretty standard, though increasing in the last 3 years is unusual in most rent structures I've seen.  If you think the rent is high for the area, feel free to negotiate it down, but as suggested, I would recommend employing a broker for this deal.  Especially with the current climate, I feel like more landlords will be willing to lease space out at lower than asking, though of course this depends on the landlord (we've worked with some crazy landlords that refuse to budge even a dime).  Again, your best bet is to work with a broker.", "replies": [], "depth": 1}, {"id": "fm736lz", "text": "NNN charges are variable but you can ask for/negotiate exclusions and caps and the way things are treated (for example whether captital expenditures are directly reimbursable or amortized over the lease). Some LLs will allow you to credit unused TI to additional free rent. \"Market\" free rent in LA has been 1mo/yr but right now I'm seeing LLs will to give more if tenants sign during this time of uncertainty. 3% annual increases are and have been standard, but now and during the 2008 recession ive seen some leases with CPI-based increases or CPI-based ceilings and floors (i.e. 2-4% based on CPI). \n\n$5.50 nnn for office in Malibu is high even in up market I can guess one or two bldgs that are asking that but they weren't getting that months ago definitely not getting now. \\~$5-6 gross maybe and there's cheaper in Malibu just not a ton of demand for office there per say...$5.50 net is more like santa monica rents.", "replies": [], "depth": 1}, {"id": "fm7lidl", "text": "My first big commercial lease as a tenant, the NNN charges were 1.28/s.f. Within three years they had tripled, with no major upgrades to the center except for parking lot repavement. \n\nIn my next lease I negotiated a cap on increases, excluding taxes and insurance.", "replies": [], "depth": 1}, {"id": "fm7ye3q", "text": "Make sure that you have a full detail of what the NNN covers/excludes. It sounds like you're still in the LOI stage but when the lease is negotiated there should be a very long section of operating expenses. Capital repairs should either be excluded or amortized. You don't want them quoting $1.85 and then next year they decide to renovate the lobby or replacing the roof and throw that all in there.\n\nYou could also ask for a cap on controllable expenses. Is there a base year on CAM?", "replies": [], "depth": 1}]