How to Lease Commercial Real Estate
Should You Work with A Commercial Realtor?
The commercial real estate market is much less standardized than the residential real estate market. For example, finding what spaces are currently available for lease is something that is, on its own, much more difficult to come by in the commercial market; not to mention the several nuisances that are involved such as zoning restrictions and so forth. For these reasons and for so much more, it’s important to consider hiring an experienced realtor in order to help navigate you through such an intricate process. I am someone who does this for living day in and day out, so I am well aware of the market conditions, vacancies in the area, renting properties that are available as well as tenant improvement allowances. I am constantly negotiating lease after lease, and always give my absolute best efforts toward helping my clients find what they’re looking for. As a small business owner myself, and having been one for the past 11 years, I will undoubtedly understand, respect and accommodate your needs. Keep in mind, it is the landlord who is normally the one who pays the realtor’s commission, giving you very little reason not to work with a realtor in choosing your commercial space.
What to Look for in A Commercial Real Estate Lease
In most cases, the first copy of a commercial real estate lease you will receive will be entirely skewed in favour of the landlord. This happens with the underlying chance that you, along with the many other tenants they serve, will just simply sign the lease without thoroughly going through its details. It is very important to know that most commercial leases are not standardized. In fact, many of the clauses in these leases can and should be negotiated so that they seem fair to both you (the tenant) and the landlord.
In most cases you are going to have to sign a personal guarantee when renting a commercial property. What this means is that if the business is not able to pay the rent, then you will be personally liable to do so. In addition to this, your landlord will likely want to run a check on your personal finances in order to make sure that you have the capability to back up the lease at hand. One thing to note here is that most landlords will do this to simply establish a track record; this being said, having a personal guarantee expire after a set period of time (say after 2 or 3 years, based on a 5-year lease) should create an easy window of negotiation in most cases.
Commercial Real Estate Fees
In most markets, commercial property is quoted either by the year or month as well as on a per square foot basis. Keep in mind, however, that the space in which you actually use for your office (called usable sq. footage) and the square footage that you are charged for, are generally different. The reason for this is that you are exclusively charged based on your usable square footage in addition to your share of the common space used in the building. For this reason, it is important to measure your space.
Types of Commercial Leases & Commercial Lease Terms
- Percentage Lease
Common with retail spaces – you pay a base rent plus a percentage of sales.
- Net Lease
In addition to the price per sq. foot, you also pay for some, if not all of the other expenses associated with running the property. In a double net lease this would include taxes as well as insurance. In a triple net lease this would include taxes, insurance, and maintenance. These are sometimes referred to as Common Area Maintenance (CAM) fees.
- Gross Lease
All fees are accounted for in the per sq. footage price quote.
Length of the lease
The best case scenario for you as the tenant is to sign and accept a short term lease with multiple options to renew after the lease is up. This way, if you go out of business or outgrow your space, you are not stuck with the original lease for an extended period of time. On the other hand, you avoid losing the space if it continues to serve your needs well. However, longer lease terms are generally more favorable to the landlord; so the longer the lease, the better the negotiating position you are in for other parts of the contract. With this in mind, commercial leases are generally longer than residential leases, and leases with terms of 5 or even 10 years are not uncommon.
How are rent increases handled?
Landlords will usually try and work into the lease an annual increase in rent based on the consumer price index or some other measure. These are also called escalations and should be fully understood before entering into any lease.
Find out who is responsible for what expenses
With most residential leases, the landlord is responsible for the maintenance of the property, including the repairs of certain things such as AC units as well as other appliances. This, however, is not always the case with a commercial property, so it is important you make sure that the lease clarifies who is responsible for what expenses.
Building Out the Space
If you need to make alterations to the space, you will want to first make sure that it is clearly outlined in the lease what alterations you are allowed to make and who is responsible in paying for them. With longer term leases it is not uncommon for the landlord to cover the costs of building out the space. It is important to also keep in mind that if you are not going to be able to use the space until it is built out, that you aren’t paying full rent during that time.
If your business needs a sign for customers, it is your advised responsibility to make sure that you understand what is and is not allowed.
Whenever possible, you want to have the ability to sublease your space. This offers some protection if you are no longer able to pay the rent or if you have expanded to the point where you need to move into larger space.
Exit Plan Clause
What happens if you have to break the lease before it’s over? Whenever possible, you want to negotiate early termination fees that are favorable; for example, a 2 or 3-month penalty.
If you sell your business, then you are going to need to assign the lease to the new owner. Some leases do not allow this, so be aware of these conditions.
If your business depends on the foot traffic that another nearby business brings into the area, then you should consider adding a co-tenancy clause to your agreement. This allows you to break your lease if the anchor tenant leaves. The co-tenancy clause is especially important for things like small shopping malls that have one or two very large stores responsible for a significant portion of the mall’s customers.
Exclusive Use Clause
If your business depends on foot traffic, then you may want to try and negotiate an exclusive use clause into the contract. This will prevent your landlord from renting the space out to one of your competitors.
There are no limits or standards that encompass how much a commercial landlord can require for a security deposit.
When is the start date of the lease?
You want to make sure that you are up and running and able to meet all the obligations of the lease before your start date. This means that the start date may need to be altered based on the date that you sign the lease.