The Ultimate Guide on How to Lease Commercial Real Estate (Part 1)
We are going to be posting a two-part blog to create the ultimate guide for leasing commercial real estate. The goal for this guide is to provide you with important information to discuss with your broker once you are ready to move forward. In this first part we will be covering search parameters, brokers and types of leases. There are three main forms that a commercial real estate lease can potentially come in: net lease, modified gross lease, and full-service lease. Because the process of finding, negotiating, and coming to terms on a commercial lease is a long process, having a better understanding of it all can help keep you and your broker on the same page. Here we go!
1. Find a Commercial Real Estate Broker
First things first — find a broker! Not sure where to start, you can always utilize our unique tools to help you find the right person! As most commercial real estate leases are facilitated by brokers, chances are you will interact with one of these three types of brokers:
- Leasing agent — brokers who represent landlords
- Tenant broker — brokers who represent tenants
- Transactional broker — there for facilitate the transaction
In a typical situation, listing agents are hired by a landlord to represent their interest and list their property. A tenant broker, who does not always have to act in the interest of the tenant, can be seen as more of an objective 3rd party in some situations. And a transaction broker, which is very common in the Denver area, is there purely to facilitate the transaction, making them a great option as well.
While there is no requirement for a tenant to use a broker, broker’s can offer help in more than just a few ways:
- List of available real estate
- Accurate market pricing and comp data
- Knowledge of local market conditions
- Negotiating skills
- Financing options
Another great benefit is that typically they are free to the tenant since the landlord will more than likely cover this fee. Also, fees can be negotiated, which is something you should speak to your broker about. Let them help you work down the price. In the end, it’s never a bad idea to engage a tenant broker and have them help you find some good locations to lease.
Finding a Commercial Broker
Space Selections provides the ultimate tools so you can find the right broker, including a specialized search and expert advice to help you through your journey. However, once you find that broker you need to make sure you are prepared when you do find one to ask the right questions.
Questions to ask when considering a commercial broker:
- What is the broker’s experience with your specific commercial needs?
- What is the size of the broker’s real estate practice?
- How is the broker being compensated?
- What is the broker’s fiduciary duty?
- Is the broker knowledgeable with the local market?
Questions aside, you want to find a broker that is a great combination of knowing what to do and genuinely caring about you — the right mix of experience and education.
Working with a Broker
Remember that it is not mandatory that you work with a tenant broker. While there are plenty of sites that allow you to search for commercial properties, keep in mind that having an experienced broker comes with many perks that shouldn’t be overlooked. For example, they will keep up on new listings, set up walkthroughs, negotiate the lease, and more. So, while it is not required to have a broker, we couldn’t recommend it more! The risks you can face if you choose to go without a broker do not come close to out weighing the benefits of working with one.
2. Set Parameters
The first step when leasing commercial real estate is for you and your broker to set property parameters. There are many options in the commercial real estate world which can vary based on the type of business. By setting parameters, you are about to limit your search to only spaces that will suit your specific needs. To set the right parameters you will need to make sure you understand the following:
- Ideal customer (or employee pool)
- Property type and zoning
- Ideal size
- Max budget
- Your business plan
Note: having a business plan before leasing is always the best way to go. Among other benefits, being able to calculate fixed expenses plus rent gives you a better idea of the budget you have for a leased property!
3. Types of Commercial Leases
When looking at commercial leases there are typically four kinds. The major difference between them is the way costs and fees are assessed.
The four types of commercial leases are:
- Full service lease
- Net lease
- Modified gross lease
- Percentage lease
Your broker can make sure that you have the correct type of commercial lease based on what you need.
Full Service Lease
The most common type of lease you will see for office buildings is full service lease. With this type of lease the rent is all-inclusive, meaning the landlord is responsible for paying the expenses associated with the property, including property taxes and insurance, repairs and maintenance, and utilities and janitorial services.
This is the most beneficial lease for the tenant. Since the landlord takes the responsibility of managing the property, there are no hidden costs. This allows businesses the opportunity to forecast their monthly and annual lease payments.
When compared to a full-service lease, a net lease is where the landlord charges a lower annual rent, but includes monthly usual costs (property taxes, property insurance, and common area maintenance). Net leases can be either a single, double, or triple net lease.
With a single net lease, a tenant pays rent plus a pro-rata share of the building’s property taxes. With a double net lease, the tenant pays a portion of the property insurance in addition to rent and property taxes. With a triple net lease, the tenant pays the pro-rata share of property taxes, property insurance, and CAMS.
What this means for the tenant is that while the base rent is lower, the tenant is also responsible for the monthly costs associated with maintaining the property, which adds on to the base lease price. Triple net leases are the most landlord-friendly. A triple net lease is most common for restaurants and retail locations.
Even with a triple net lease, you’ll still need to have property insurance. So, make sure that you get a quote — your broker should not let you overlook this step!
Modified Gross Lease
If you are looking for a middle ground, then a modified gross lease is a compromise of the other two leases discussed. If you are under a modified gross lease, then as a tenant you might pay for your portion of the property taxes, property insurance, and CAMS, but instead of monthly, it is paid it as a lump sum along with rent.
Therefore, the rent on a modified gross lease is fixed and there are no hidden costs or unexpected charges. Utilities and janitorial services are covered by the landlord with a modified gross lease. If any of the taxes, insurance, or CAMS increases, the rent remains the same. This is not the case with a net lease.
A percentage lease agreement generally decreases the base rate for lessees and offers the lessor additional upside potential. This is more common for short term, and requires that the landlord see the value in the business — in lieu of cash up front in rent, they will receive a percentage of sales. This is most commonly used for businesses who do not have the cash in hand to pay a higher lease in the beginning, and is something that should only be entered into with the right guidance — it is always good to speak with a broker about this option lease.
Continue reading “part 2” for continued advice on “how to lease commercial real estate”!