Welcome to the second part of our two part series on how to lease commercial real estate space. If you missed part 1, be sure to read that first! For part 2, we will be discussing how you and your broker can identify the right property and what to expect from your broker when negotiating terms.
1. Finding the right property
On top of the property parameters that we discussed previously, you also need to take these factors into consideration during your search for the right property:
- Location — Is the location close to your ideal customer and/or workforce? Other considerations include adequate foot traffic, vehicle traffic and parking for customers and employees.
- Amenities and Services — You’ll need to think of what you need. Amenities and services may include communal rooms, free Wi-Fi, loading bays and docks, dining options, outdoor space, sewage and utilities, on-site security, and more. The zoning of your business can often dictate what you need.
- History of Landlord — Since most commercial leases often last more than one year, you want to try and get to know your landlord to make sure this is a good long term fit. There are websites with reviews for landlords.
- Anchor Tenants — If you are going to sign a lease with an anchor tenant, make sure you do your due diligence. An anchor tenant is just how it sounds, they anchor a mall or shopping center (typically big box store). If the anchor tenant leaves, the landlord might be able to legally get out of the property’s other leases.
Conduct more than one walkthrough
It is always best to identify multiple commercial spaces to view. This will allow you to get a better grasp on what the average price is and gives your broker more options during negotiating. Always compare rents and other fees during your search so that you have an accurate picture and can stay on budget. A good rule to follow is to consider somewhere in the range of 5–10 commercial properties before you settle on a lease.
Initial walkthroughs will more than likely be conducted with your broker and the landlord’s broker. These walk-throughs are called “technical property reviews.” If you are going to need to do a build out or tenant improvements, it is smart to do an additional walk through with your contractor. Depending on the lease and your specific scenario, some build outs or improvements may be partially covered by the landlord. It is important to get an accurate estimate for your renovation so you can use that during negotiations for the lease.
Once you decide on a couple of spaces you are interested in, make sure to go back at different times of the day. You want to see what the foot traffic is like as well as what happens around the properties throughout the day.
2. Negotiating Commercial Lease Terms
Now that you have done multiple walkthroughs, looked over all options based on each property location and lease, it’s time to sit down with your broker and choose one or two commercial spaces to begin lease negotiations.
A commercial lease negotiation process is typically entered into more formally. You will need to start by requesting terms in writing. Your broker can send the request and the landlord’s broker will supply it. Up next, you will want to write a letter of intent (LOI) which represents your offer or counteroffer, depending where you are in the process. LOI’s are great because you can use them to sell the landlord on why you would be the best tenant for that building, as well as put into writing what you are asking for.
Here are some things your broker will include in your letter of intent:
- Statement with your intent to lease
- Description of your business
- Number of years in business
- List of products and services, including pricing
- Your proposed terms
The terms can be the terms that were given by the landlord, or a counteroffer from you and your broker. Typically, terms include the type of lease and rental price, and sometimes even more specific terms.
Common Commercial Lease Terms
Regardless of the type of lease (fixed, net, etc.), commercial leases will often have similar lease terms. While the payment structure might differ, all leases include such things as the required deposit, the length of the lease, and more. Specifically, you’ll want to understand the following terms of your lease:
- Use clause — This determines the type of business that can use the space. This use clause is very important if you think you may sublease your space in the future since it limits the businesses available to sublease.
- Length of lease — Commercial leases typically range from 3–10 years.
- Assignability — A lease has to be “assignable” if a business wants to eventually sublease the property.
- Capital expenditures — These expenditures determine who’s responsible for the repairs, maintenance, and other costs associated with the commercial property.
- Rent and escalation — An escalation is a term that allows a landlord to legally increase the rent during the lease. It’s common to see rent escalations equal to 3% a year.
- Deposit — The typical deposit is between 3–6 months rent.
- Lease build-out credits — These credits represent the ability for a tenant to make leasehold improvements in their commercial space at the expense of the landlord.
- Termination clause — This is a clause within the lease that allows the landlord and/or the tenant to terminate the agreement under certain conditions.
- Rent abatement — If the commercial property is damaged, the tenant won’t have to pay rent (or will pay a reduced rent) until the damage is fixed. This is a great way to reduce the risk of a business.
Always keep in mind that a commercial real estate lease is a long-term rental agreement. It is between the business and the landlord of that space. There are many types of commercial leases out there, and many types of spaces as well. The three leases you should expect to encounter are: full service leases, net leases and modified gross leases. These are all best when used on specific spaces like office, retail, restaurant and industrial. Make sure to use the knowledge and expertise of your broker to help you discover which one will work best for you based on your business needs.
Looking for that expert guidance on your next commercial real estate project? Head over to our Survey page, submit a form and connect with an expert who can help you along your journey. If you have additional questions we can answer, we are happy to help! Just contact us in order to have a representative reach out to you directly!