This article is going to give you an overview some of the basic points to consider and how to lease commercial real estate. Renting commercial space is much different than residential as there are a lot of nuances to consider. Mistakes made or terms overlooked when renting commercial space could potentially cost you thousands of dollars.
We have only scratched the tip of the iceberg below however this will be a good starting point. Our blog has a ton of other articles that will teach you everything you need to know.
Does it Make Sense to Work With a Commercial Real Estate Broker?
Compared to the standardized residential real estate, the commercial real estate market is so much more dynamic and irregular. Checking the availability of commercial spaces itself takes a good bit of effort. The market involves a lot of nuances when it comes to commercial use and zoning restrictions, which you would be better equipped to handle with the help of an experienced broker. So you needn’t have qualms about working with a broker, as the broker’s commission is usually paid by the landlord.
Choosing the Correct Commercial Broker
While a leasing agent would be hired by the landlord and represent his or her interests, a tenant broker will have your company’s best interests and requirements in mind. Typically, you would be required sign a representation agreement while working with a tenant broker, granting them exclusive rights for a designated duration, to represent you when you buy property. Make sure when choosing a broker that you know where their loyalties lie. There can be a conflict of interest if your broker works for the company that is also marketing the space for rent.
How to Go About Looking For a Commercial Real Estate Broker
You can start by searching the internet and pay attention to the number of reviews and satisfied clients they have, ask friends, family, or business associates, or ask your attorney if you have one. A competent real estate attorney may have a network of brokers and agents that they have built over their years of experience. Alternatively, you can seek referrals from companies you know who have leased commercial real estate and have had great experiences.
Break-down of a Commercial Real Estate Lease
It stands to reason that when you receive the first draft of the commercial real estate lease, you will find that it wholly favors the landlord’s interests. The outcome they’re hoping for is to be able to rush you through the process, and like their previous tenants that you will go ahead and sign the lease without paying much attention to the details. So you must keep in mind that there are no real standard or systemized commercial leases. In fact, you would be wise to assess the lease as most of the clauses put down are open to negotiation so that both parties walk away satisfied.
Personal Guarantees When Leasing Commercial Space
One of the requirements when renting commercial real estate is a personal guarantee by the lessor. They require it to guarantee that even if the business is unable to pay their dues, you personally would be held liable to make good on the rent amount. This would very likely entail your landlord reviewing your personal finances as an assurance that you have the means to uphold the lease. Bear in mind that this is done so as to assure the landlord that you have a clean track record and you can definitely negotiate to have the personal guarantee expire after 2 or 3 years. Personal guarantees are negotiable such as the amount, timing, etc.)
Commercial Real Estate Fees
Generally, lease rates for commercial property such as office space are quoted on a square foot basis and on an annual or monthly basis. Nonetheless, it’s important to note that there is a difference between the usable square footage (the actual office space used) and the overall rentable square footage that you will have to shell out for. This is because the charge includes not only your usable office space but also your portion of the building’s common space. It’s important that you have the space measured by a space planner or architect to ensure that you are not paying for more square footage than you occupy.
Different Types of Commercial Leases & Commercial Lease Terms
This type of lease is used when renting out retail spaces. Retail volume tends to vary considerably when you consider factors like the economy and also location. This is why the landlord would require the tenant to pay a base rent and additionally the tenant would also pay a percentage of their retail gross income.
When it comes to net lease for the commercial property, the lessee agrees to pay a lower base rent and in addition part or all of the property insurance, real estate taxes and common area maintenance fees (CAMS). If you have a double net lease, this would require you to pay both insurance and taxes. But if you have a triple net lease you would have to shell out for insurance, taxes, and maintenance as well.
As a tenant, this is one of the most common pain points that you would need to address. Make sure you do your research on all that the CAM fees would entail and then come to an agreement with your landlord for caps on the rate at which they will be increased annually, before signing on the dotted line.
In this type of lease, the rent is all-inclusive. It means that all fees are covered in the per square footage price itself. Here the landlord would have to bear the expenses associated with the property, including maintenance, taxes, and insurance which are drawn out of the rent received from the lessees.
Length of the Lease
For tenants, it would be ideal if you have a short term lease and one that gives you several possibilities to renew once your lease is up. So you are guaranteed that even if the business doesn’t pick up or if your company expands to the point where you outgrow the space, you are not shackled by the lease. Additionally, it guarantees that you have a chance to retain the space if it carries on serving your needs.
While it is true that a long-term lease serves to favor the landlord, it still allows the tenant leverage, to conduct a much better negotiation when it comes to other points in the lease. Residential leases are for far shorter durations than commercial leases which can sometimes go up to terms of 5 or even 10 years.
How to Handle Rent Increases
Typically for an annual rent increase, factors like consumer price index or other similar amounts are edged into the lease by landlords. Tenants should do a thorough research on these escalations before they consider signing the lease.
Who is Responsible for the Expenses?
As opposed to residential real estate, where the landlord bears the cost of property maintenance that includes AC unit, elevator and other repairs, commercial leases, on the other hand, are not as streamlined as that and may vary from property to property. So it makes sense from the outset, to make perfectly clear, exactly which expenses will fall on you and which will be looked after by the landlord.
Expenses of Building Out
After viewing the property, you may have some alterations in mind for space. Check the lease to see what your options are and to what extent you can make alterations to the structure and check whether you would be bearing the expenses or your landlord. It’s common with long-term leases that the some or all of the costs of building out space are borne by the landlord. Also, make sure that you negotiate to not have to pay rent while building out your commercial space.
Say your business requires signage to be put up for your customers; there will be various clauses in your lease that involve practical understandings like these between your landlord and you. Find out the dos and don’ts beforehand. Make sure you understand the signage criteria required by the landlord and the city that you are renting commercial space in.
It works very much to your advantage to have a deal where you are allowed to sublease your office space. It serves to cover you, when you are either unable to make the rent or if your company has outgrown the space and plan on shifting to larger offices.
Exit Plan Clause
If for some reason you need to terminate the lease before time, you can’t do so haphazardly. In fact, before you even sign the lease, try to have a provision added where the landlord grants you an “out” should you make up your mind to leave before the lease is up.
Assignability refers to the situation when the lessee transfers all the obligations and interests of the lease to a third party or new owner. You would have to check and see whether your lease permits you to do this.
In cases where your business is nourished by and piggybacks off of the traffic driven in by a neighboring business, you should strongly consider inserting a co-tenancy clause, which affords you the chance to terminate your lease on the grounds that the anchor tenant has left. In large retail shopping centers where there maybe one or two large retail stores that generate the majority of the centers traffic this is especially important.
Exclusive Use Clause
For businesses that are dependent on foot traffic, it would advisable to negotiate with your landlord an exclusive use clause to be inserted into the lease. This way you can guarantee that your landlord does not rent out space to any other business that would pose a conflict of interest to you.
Unfortunately, when it comes to security deposits required by the commercial landlord, there is no set limit or measurable standard that can be referred to.
Start Date of the Lease
Before signing, make sure your business has settled in well and that you have the means and resources to fulfill all the obligations of the lease. Hence to give yourself time, the start date would need to be a little prior to the date you sign the lease.
If you have any questions about the commercial real estate leasing process feel free to give us a call at 512-861-0525 or check out our blog that we have put a a lot of heart and soul into to making educational and helpful.