Tag Archives: commercial lease

What is Tenant Representation?

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For some, finding the commercial real estate (CRE) that best fits their space needs, location, price point, and amenity wishlist may seem daunting. Others throw themselves into this process head first, excited about the prospect of discovering a new space for their business endeavors, and then sealing the deal. Whichever group you’re in, having tenant representation on your side to guide you through property comparisons, needs assessments, and detailed lease negotiations is not only invaluable – it’s been shown to save lessees thousands of dollars.

What is Tenant Representation?

When CRE landlords lease space, they hire a leasing group (brokerage firm) to represent their best interests. These include marketing, negotiating, and securing a lessee under contract. This is done to ensure that landlords’ costs are covered and that they profit from lease agreements.

Tenant representation, on the other hand, is about representing the tenant who is looking for office, warehouse, manufacturing, or other commercial space. Tenant representatives serve tenants for free. This may seem too good to be true, but in reality, the process is set up to protect the tenant. Here’s how it works: the listing brokerage firm signs a contract with the property landlord. If no tenant representative is hired by a tenant, that listing broker gets the entire negotiated commission fee when a lease is signed.

However, when a tenant representative is present, the commission is split with them. In other words, your landlord pays for you to be represented by an industry professional.

That’s just the tip of the iceberg when it comes to the benefits of hiring a tenant representative.

Benefits of Tenant Representation

Works for You – and Only You

Tenant representatives are solely there to protect your interests. They help you avoid leases that work great for your landlord but leave you stuck with a less-than-ideal contract.

If you decide to go it alone, landlord representatives are incentivized to negotiate a lease that benefits their boss but may include terms that are bad for you. These may include hidden fees, above-market pricing, and space specifications that don’t fully align with your business needs.

Your tenant representative, on the other hand, only has you and your business in mind. This means that they work with you to get the best lease terms, options, and space to meet your needs. For instance, if you’re considering bringing warehousing in-house, your tenant representative may recommend a multi-functional flex space so that your space needs are met for the entire duration of the lease, even if you haven’t made a final decision on the matter prior to signing the contract.

A hand holding a pen against the date field of a lease agreement on a clipboard.
Everyone’s financial plans and situations are different, and that’s why it’s important to get expert guidance that’s personalized to you.

Negotiates to Save You Thousands

Saving just a dime per square foot on a 5,000 square foot facility puts over $10,000 in your company’s pocket for a two-year lease. Direct savings like this can be the outcome of your tenant representative’s market research. This gives you valuable leverage in the form of alternative leasing options. They can be brought to the negotiation table to get you the best deal.

Just as importantly, your tenant representative understands all the hidden costs of leases, such as:

  • Overage Fees if building operating expenses exceed the projected building budget
  • Load Factor Fees for areas that don’t actually meet the criteria for rentable square footage
  • Excess Administration Fees that are often tacked on to Common Area Maintenance (CAM) fees

Tenant representation informs you of all your lease obligations so you don’t have any surprise expenses. Whether you’re new to leasing or are interested in relocating, expanding, renewing, or taking advantage of your current lease options, having an advocate negotiating on your behalf is invaluable.

Provides Expert Space Needs Analysis

More than any other area, tenants miss the mark when assessing their actual space needs. They do tend to consider the desired environment and locale of the commercial space they’re seeking. However, they fail to apply deep analytics of business processes, staffing, clients, and future plans. A tenant representative will use interviews, company data, and software tools to look at:

  • How your company functions
  • Expansion or contraction plans
  • Your workforce
  • Your customers
  • Space criteria you have
  • Your location criteria

This space needs analysis provides a much more sound strategy for moving forward in finding an ideal property for your business and negotiating the best lease agreement.

Researches Multiple Space Options

The creative space where you build and grow your products, services, sales, and systems is an integral part of what keeps your customers coming back for more. Tenant representatives understand this dynamic, and they are always on the lookout for exceptional leasing opportunities for you.

Another key part of their job is to find multiple properties that meet your business needs. They then perform side-by-side comparisons using market analytics to help rule out spaces that aren’t ideal, such as those that are above market value. Providing you with similar options is also a key way to optimize negotiations in your favor.  

Offers Industry Expertise

Perhaps the most valuable skill tenant representatives offer is their industry knowledge. Navigating the world of leasing types, options, amenities, space configurations, costs, hidden fees, terms, and market trends can be overwhelming. Here are a few ways a tenant representative helps give you peace of mind during this process.

Guidance on Lease Types

Rent is one of the biggest expenses many businesses face each month. Managing this recurring financial obligation can be helped along by the right type of lease. For instance, while a full-service lease provides the most tenant protection by bundling all costs into one payment, it also offers the least flexibility. There’s no way to save on items like utility bills by cutting back on usage. A percentage lease, on the other hand, offers a more flexible option. It allows tenants to pay a lower base rent plus a percentage of sales. This makes it an attractive choice for those in financial recovery.

Everyone’s financial plans and situations are different. That’s why it’s important to get expert guidance that’s personalized to you.

Guidance on Lease Options

Just like with lease types, there are various lease options that can be written into your lease. They address different elements for which a lessee may require flexibility due to the unpredictable nature of business. Some of these include the options to:

  • Renew
  • Extend
  • Expand or contract
  • Purchase
  • Terminate

The space needs analysis that your tenant representative performs is a great tool to guide you through the options you’d like to include in your commercial lease.

Guidance on Local CRE Trends

Trends in regional CRE can have a big impact on the price you pay for properties. For example, tenants looking for office space who are willing to sublease will do particularly well due to the large number of corporate lessees looking to unload space that was previously occupied by staff who are now working remotely. Tenant representatives keep on top of these market patterns. They use them to connect you with properties that meet your space needs while giving you the most bang for your buck.

3 Things to Look for in a Tenant Representative

1. Local Experience in Property Design, Sales, and Marketing

The more involved your tenant representative’s brokerage firm is in the design, sales, and marketing of commercial property in your community, the better they can guide you to CRE that best fits your space needs. Experienced local tenant representatives are able to quickly and accurately analyze and compare the needs assessment they perform for you against available local properties because of their insider expertise.

In other words, they are familiar with the properties that are on the leasing market.

Pro Tip: Ensure that you are well represented. Ask to see the sales and design portfolio of your prospective tenant representative’s brokerage firm.

2. Proven Negotiation Skills

While local market connections and expertise are important, the bottom line happens at the negotiating table. Ask about the latest deals your tenant representative has closed, and how many of those were in the type of commercial space that you’re interested in. You can also have a discussion about the various points of focus that will be discussed during negotiations so you get a better feel about what to expect.

Pro-Tip: Find out your prospective tenant representative’s relationship with local landlords; good relationships can be a negotiation plus.

3. Employment of Market Analysis Tools

A skilled negotiator’s best friend is market analysis. It provides them with the detailed information needed to successfully advocate for you. Your tenant representative decides what information to input into analysis software, but the tools themselves fine-tune these inputs and create outputs that allow for side-by-side property comparisons utilizing the most up-to-date prices, upgrades, features, and lease inclusions.   

Pro-Tip: Ask what market research tools a tenant representative employs.

Whether you’re leasing your first property or are interested in moving into a space that better suits your needs, Speed Commercial Real Estate offers advanced market analytics, expert space needs assessments, and 17 years of experience in the Mississippi commercial real estate market. Contact us today to work with one of our local tenant representation professionals who will support, guide, and advocate for you through every step of the commercial leasing process.

Commercial Real Estate Terminology

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If it’s your first time entering the commercial real estate market, you’ve likely been confused by a number of terms that you’ve heard. Like any profession, the commercial real estate world has its own set of lingo. You’ll need to understand it if you’re going to get the best deal. This is true whether you’re looking to acquire a new space or lease out one that you already own. In this post, we’ll cover the commercial real estate terminology that you need in order to make informed decisions. Use these terms to have meaningful conversations with commercial real estate professionals.

Commercial Real Estate Terminology

This first set of terms will include all of the most common words and phrases you’ll hear when discussing or researching commercial real estate investments. We’ve broken them down into logical groupings to make it easier to read. You can also find what you are looking for quickly if you are here for a specific term. 

Financial Terms

Some of the most confusing parts of real estate terminology are those related to finances. Although several of these terms are familiar to anyone who runs a business, there are some that are unique to real estate.

Net Operating Income

This is a simple valuation metric for a property. It consists of the property’s income minus its expenses. When counting expenses, mortgage payments and other debt service fees are not included. It is a metric purely of property expenses, so the NOI of a property does not change when the underlying loan does.

Capitalization Rate 

The NOI metric makes it easy to determine how well a property is doing independently of factors that will change when ownership does, but it doesn’t provide a full picture. By dividing the NOI by the market value of the property, the capitalization rate gives a better picture of what a potential investment is worth. You may also see this term abbreviated as cap rate.

Cash Flow 

Sometimes, you want to know exactly how much money a property is generating. While the NOI metric we’ve discussed so far leaves out mortgage and debt expenses, cash flow adds those expenses into the equation. NOI is used to remove the previous owner’s loan information from the equation, and cash flow is used to account for that of the new owner.

Cash On Cash Return / ROI 

Once you have your cash flow figured out, you can use it to calculate how quickly you’ll get your investment back. Your cash on cash return, or return on investment (ROI), is the cash flow of the property divided by the total cash you’ve invested. The cash invested includes the down payment and any additional fees that were paid.  

Cash Out Refinance 

By increasing the NOI on a property, investors can refinance the property at its new, higher value. Doing so allows them to pull out the original down payment, so they can pay off investors while still retaining ownership of the property. This is a common technique in the commercial real estate market. 

Debt Service Coverage Ratio 

This is also called the debt coverage ratio or debt to income ratio. This is a metric used by banks to determine how much money you will have leftover after you’ve paid them. It is calculated by dividing your NOI by your annual debt. A DSCR of 1.0 would mean every penny of your income is going to cover your debt. To ensure that a loan is lendable, banks like to see a DSCR of 1.2 or higher. This lets them know that you will be able to easily afford your payments and not just be skating by month to month.

Building Classes

As you search for your commercial property, you’ll come across buildings rated by class. These rating will let you know what kind of condition the building is in.

  • Class A — These are top-of-the-line buildings. They are newer construction in high-value areas of town. You can be assured that a Class A building will be in pristine condition, but the price will be high.
  • Class B — These buildings are a little older and may need some minor upkeep. But, they are sound properties that you can expect to be in passable condition.
  • Class C — These buildings are fixer-uppers. They can be expected to be older buildings that need work done to restore them to their former glory. 

Types of Lease

Learning the terms and conditions of a lease is an important part of understanding commercial real estate terminology. It will help you be able to compare the options available to you. 

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Full-Service Lease 

With a full-service lease, the tenant will pay the landlord a single fee and the landlord will pay for everything else. This includes taxes, utilities, repairs, insurance, and other expenses.

Triple Net Lease 

The various net leases shift some financial burden to the tenant. Under a triple net lease, tenants must pay taxes, insurance, and maintenance. The other types are grouped together under modified gross lease below.

Modified Gross Lease 

This is an umbrella term for double net leases, single net leases, or any other type of lease where clients and landlords split responsibility for payment. With double net leases, landlords pay for maintenance, and single net leases are when landlords pay for everything except taxes.

Ground Lease

This is a leasing arrangement where the tenant owns the building, but leases the land that it is on. Because of the unique situation these leases present, they often have very long terms and options to renew.

Other Real Estate Terminology: Lease Terms

Understanding your leasing options will require more than just knowing what the type of lease is. The terms below explain what you are expected to pay and what you’ll be getting in exchange for that payment. 

Base Rent

As seen above, some leases require additional fees to be paid by the tenant. The base rent is the amount you’ll be paying solely for rent. Any taxes, insurance, or maintenance fees that may be applicable are not included in this figure. 

Usable Square Footage 

This is often used in relation to office space. This figure tells you exactly how much space will be exclusively for you. Lobbies and other common areas are shared commercial space that you’ll technically have access to. However, they aren’t very useful in knowing what you can do with a space. The usable square footage figure excludes those areas.

Per-square-foot Rent 

When looking at properties of varying size, comparing base prices is a lot like comparing apples and oranges. Divide the rent by the square footage. This way, you’ll have a more accurate picture of how the different properties compare in price. This figure is almost always provided for you, so you won’t need to do the math yourself.

People to Know

Being able to use this real estate terminology doesn’t mean a lot if you aren’t talking to the right person. There are a number of professionals involved in the commercial real estate business. This list will help you figure out which ones you need to be talking to for your specific goal. 

Property Manager 

Landlords rarely handle the day-to-day operations of managing their properties themselves, especially if they own many properties. A property manager is someone who is paid by the landlord to handle those responsibilities. In addition to the day-to-day operations and maintenance duties, property managers will find renters for vacant space and ensure that prices are competitive with the market.

Real Estate Agent 

A real estate agent is a real estate sales professional that has passed the certification in their state to use the title. Each state has different requirements before someone can use the title of real estate agent, but real estate agents in all states are licensed professionals.

Leasing Agent 

When a property owner decides that they want to lease out their property, they need a real estate professional to help them through the process. This is the job of the leasing agent. They help determine an optimal price for your property, work on your behalf to collect rent and provide customer service, and facilitate sales by posting listings and giving tours.

Real Estate Broker 

If a real estate agent wants to take the next step in their career, they can pursue further training and become a real estate broker. Again, each state’s requirements are different, but real estate brokers have a more in-depth knowledge of the real estate business than agents do. The extra training includes topics such as real-estate law, insurance, and ethics. You may hear the terms principal broker, managing broker, and associate broker. These terms represent a broker’s rank at their brokerage, in descending order. 

Tenant Broker

Just as a listing agent helps people seeking to lease out their properties, a tenant broker helps people looking for properties to lease. They will be able to explain the current real estate market, help you find properties that match your needs, and negotiate the best deals for you.

Real Estate Terminology is Easier with Professionals

Even when you know the common commercial real estate terminology, dealing with real estate can be confusing. The complexity of commercial real estate makes it even more confusing. Whether you are using your new property as an investment or as your next headquarters, getting the right deal can make a big impact on how successful you are. If you need advice for your next real estate deal, we invite you to contact a representative from Speed Commercial Real Estate today. 

5 Reasons to Consider a Flex Space for Your Business

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If you’ve been hanging around real estate circles these past few years, you’ve probably come across the term Flex Space. But what does it mean, and how can it work for your business? 

Well, people are no longer shying away from embracing new ways of organizing corporate spaces. They want solutions that are more efficient, cheaper, and that offer the flexibility necessary to survive in the 21st-century business world.

For years now, businesses would rent real estate spaces that are fixed for particular purposes on long term leases of about ten years. For example, a company would separately lease a warehouse and its office spaces on long term leases. This layout has been the norm for several years. However, it won’t be long before such a business runs into some challenges with this layout. These may include:

  • Wasted warehouse space when demand expands and goods fly off the shelves
  • Wasted office space when the staff become redundant
  • The need to upgrade for more space when demand falls
  • Lack of flexibility when the contract no longer works in favor of the business

What is Flex Space?

 A Flex Space is a form of commercial real estate with a warehouse, office, and retail space. It is usually a sizable warehouse-style building with a built-to–spec office space and a shorter lease than a traditional office.

A Flex Space setup is becoming more attractive to investors who find short term leases more convenient than long term leases. The ability of a Flex Space to easily shift from one purpose to another also endears it to real estate clients.

What Sets Flex Space Apart From Other Real Estate Options?

Over the past few years, commercial real estate has generally fallen into two broad categories: traditional office spaces and flexible office spaces. But what separates flexible office spaces from its contemporary counterpart? These are but a few differences that make Flex Space unique and worth consideration: 

1. Length of the Agreement Terms

Traditional office spaces were leased in terms of about 7-10 years, depending on the business operations. Flex Spaces, on the other hand, are leased from about seven months to three years. All of this depends on how long your commercial lease should be. Real estate experts go even further and classify all real-estate options that are leasable for less than three years as part of flexible real estate. This is regardless of whether they are traditional office spaces or flex spaces.

2. Co-working and Shared Spaces 

One characteristic common with traditional office spaces is that they are leased by one company. It is uncommon to find a traditional office space or warehouse shared by two or more companies. Not with Flex Spaces. Most Flex Spaces are shared and collectively leased by multiple companies or businesses. Flex Spaces have become a staple for any business that uses the internet or co-working for its day-to-day operations.

 3. The Ability to Share Amenities

The fact that Flex Spaces have shared spaces has led to shared amenities. Depending on the type of Flex Space you choose, there will be a wide range of amenities available to all tenants. These amenities may include free Wi-Fi, coffee, and lounges. The ability to share amenities does not exist in traditional office spaces.

4. Lower Startup Capital

Before a business sets up a traditional office space, there is a lot of investment required just to get the office space running. These expenses include wiring, design, furniture, office devices, and many other things necessary for running an office. Flex Spaces, on the other hand, only require an initial payment; the Flex Space offers all the design, furniture, and office devices.

5. Multi-Functional Flex Space

Unlike traditional office spaces, Flex Spaces have been designed in such a way that they can perform multiple functions. A Flex Space can serve as an office, a retail center, a research center, or a warehouse with little to no modification.

Why You Should Consider Using Flex Space

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Considering a Flex Space as an option will come with various benefits for your business. Most of these arise from its flexibility as compared to traditional office spaces. Some reasons that should have you thinking about Flex Spaces are:

1. Scalability

Embracing Flexible Spaces as a real estate option offers your business the ability to grow or contract its operation depending on the circumstances. If your company expands and requires a few more feet of office space, that is a phone call away. On the other hand, if you wind down operations in one area and require a smaller space, your Flex space has you sorted.

2. Little To No Initial Costs

The initial costs of setting up a new corporate space can be massive. Funding the furniture, the design, and amenities – added to the monthly maintenance costs, can take a toll on a business. With Flex Spaces, your firm does not have to worry about initial costs, as there are little to none. You only have to worry about rent depending on what dictates commercial rent prices in your area.

3. A Sense of Community

Compared to working from home or remote working, the shared spaces in Flex Spaces create a sense of community and teamwork. One obvious downside of remote working is that it detaches workers from their teams and firms. Flex Spaces, however, create a sense of belonging and motivation between working employees.

4. Improved Networking

Flex Spaces where various companies or workers co-exist create environments that encourage the sharing of ideas. Like-minded entrepreneurs can meet and brainstorm new ideas as other employees make friends and socialize.

5. Contract Flexibility

The brief nature of Flex Space contracts gives your business wriggle room whenever things don’t go your way. The real estate market is volatile; nobody knows how coronavirus will affect the real estate market. A ten-year contract can mean that you are stuck with that real estate agent for a long time. A three-year contract or a twelve-month contract is, however, less binding. Whenever you feel like the location is not working for your business, you can always opt-out.

5. Space Flexibility

The ability of Flexible Spaces to shapeshift into different spaces is a crucial benefit to many businesses. The fact that Flexible Spaces can serve other purposes with minimal adjustments makes them a Godsend to several firms.

The Key Take-Away

If you’re interested in Flex Spaces or more information about Real Estate options for your business, Speed Commercial Real Estate is the place for you. We have been giving answers to the real estate clients of the Jackson Metro area for years now. For more information, contact us today, and we will be more than willing to help.

What Dictates Commercial Rent Prices?

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Realizing a return on investment (ROI) is a priority for every entrepreneur, and the same applies to those who invest in commercial real estate. If you want to invest effectively, you need to understand the current commercial rent prices and the future worth of commercial properties. This applies whether you are considering an office building, warehouse, multifamily property, commercial shopping center, retail space, or any other type of commercial property.

Such insight will help you maximize your returns by opting for the right property. The factors that affect commercial rent prices lie in three major categories, namely:

  • Economic Factors.
  • Location Factors.
  • Property Factors.

Each of the aspects above has a significant impact on the prices of commercial buildings. Here is a breakdown of every category.

Economic Factors in Commercial Rent Prices

a) Interest Rates

Without a doubt, interest rates are the most significant driver of commercial rent prices. This is because those who invest in real estate use leverage or other people’s money to buy property. Interest rates here refers to the cost of credit. As such, when interest rates fall, credit becomes cheaper. Then, more funds flow into capital improvements and commercial real estate since the yields are higher due to rising property values.

On the other hand, high interest rates lower property values as a result of declining yields from the high cost of financing. In such situations, fewer people are willing to invest in commercial buildings. This causes the demand for the same to fall and, subsequently, the prices.

b) Wage Growth

The most recent and highest annual growth rate in three years is the wage growth of 2.3% by the end of 2018. Growing wages allow individuals/families to have more disposable income, which can encourage them to invest in commercial property. Wages are critical indicators of how cheap or expensive commercial property is at any given point.

Location Factors in Commercial Rent Prices

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a) Transport

The quality of transport systems has a direct impact on the valuation of commercial property. That means that acquiring commercial property in an area with a sufficient supply of transportation networks will attract higher yields. Also, in most cases, commercial buildings within a transport hub are in high demand. Potential investors are focusing on capitalizing on the increased foot traffic in such areas. That, in turn, causes the prices of commercial properties in such locations to surge upwards.

Improving accessibility to commercial property centers is possible through the development of transport networks. That is why the prices of existing and new commercial buildings rise follows the improvement of roads serving such properties.

b) Population Growth

Education levels, births, age distribution, and migration are some of the factors that contribute to population growth in a specific region. For example, the demand for high-end restaurants and retail may be high in an area that is experiencing an increase in the number of high-tech jobs.

On the other hand, there will most likely be a surge in demand for assisted living and retirement facilities within a submarket with an aging population.

Property Factors in Commercial Rent Prices

a) Location

Talking about commercial real estate prices without mentioning the location factor is next to impossible. The reason for this is that different locations impact the desirability of commercial buildings. This, in turn, affect the prices of such property. Some of the critical considerations, in this case, include zoning for your nature of business and the location’s accessibility for your target customers as well as potential workers.

A characteristic example, in this case, is a traditional retail property sitting in an area with multiple apartments and where there are few restaurants to serve the residents. Hotel operators will be competing for that commercial space, which will increase the price of the latter.

b) Potential for Development

The possibility of developing a particular commercial building further can push its price upwards as well. That is because the highest-and-best-use for such property in the future may be different from the initial design. For instance, the demand for multifamily residential property is growing in many real estate markets.

As a result, you are likely to see the redevelopment of obsolete shopping centers into higher density residential housing and the conversion of warehouses into live-work spaces.

Other Factors in Commercial Rent Prices

a) Credit Scores/Financing/Rates

Low-interest rates do not suggest that every borrower can access the same when buying or leasing commercial property. The creditworthiness and credit history of an individual or business are worth considering in such situations. If your credit ratings are low, you will most likely pay higher interest rates, which means that you’ll end up paying more in the long-term.

That ultimately makes purchasing commercial property more expensive.

b) Sale Or Leasing Method

The way someone chooses to sell or lease their commercial property will affect the overall price of such property. Additionally, the time and effort it takes to promote a specific commercial property will impact its price. Some of the approaches used to sell or lease properties include trades, auctions, leaseback, or exchanges – each of which come with their own unique costs.

c) The Urgency to Sell Or Rent Property

The speed with which a property owner wants to sell an asset or find a tenant will dictate commercial rent prices, too. For example, if a property is taking too long to offload, its owner can decide to take a lower offer to speed up the sale. If there is no urgency to sell or lease a particular commercial building, one may opt to hold out and wait until they find a match for their valuation.

If you’re interested in renting a commercial property for your needs, reach out to us. We’re happy to help you find what you need.

 

How To Negotiate a Commercial Lease

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Many new business owners have only ever dealt with residential leases. Residential leases are generally standardized and only rarely is a company willing to negotiate with a tenant. A commercial lease, on the other hand, is completely different.

Everything in a commercial lease is open to negotiation, from the rent to the length of the lease to who is responsible for which repairs. This realization can be overwhelming to a new business owner. Here are some tips on negotiating a commercial lease, and remember that you will probably want to involve a lawyer at some point in the process.

Know Your Budget and Priorities

Before you even start searching for a building or part of a building to lease, you need to know your budget and your priorities.  How much you can afford to spend is the first factor.

Then put down a list of the things you absolutely must have. This includes features of the building itself, such as minimum square footage or number of parking spaces, but it should also include clauses you want in the lease. You might, for example, need certain improvements to the property to be made before you can move in. Make sure your lease allows you to cure a default before eviction.

After that, come the nice-to-haves. A sublet clause? If your business is brand new, that might be a must-have. You might also want to try and get your landlord barred from renting a unit close to yours to a similar business, which can matter a lot in retail.

Know Your Commercial Lease Types

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There are four basic types of commercial lease in terms of who pays for what:

  1. Single net lease or net lease. The tenant pays utilities and property tax, while the landlord covers maintenance, repairs, and insurance.
  2. Double net lease. Tenant pays utilities, property tax, and insurance, landlord covers maintenance and repairs.
  3. Triple net lease. Tenant responsible for all costs except major structural repairs.
  4. Full service gross or modified gross. Structural repairs and operating expenses, including insurance, taxes, and utilities are split between the tenant and the landlord.

If you are leasing in a multi-tenant building, expect a full-service gross lease, as this divides building expenses between tenants, usually by a formula based on square footage. These leases vary in precise details. For example, you may be responsible for your own janitorial services or there may be a building service tenants pay for on a pro rata basis. Make sure you know every detail of the lease you are signing.

Research Fair Market Rent

Find out what similar units or buildings are going for under similar commercial lease terms. If the rent seems too high, you can use this research as ammunition to negotiate a lower rate.

If, on the other hand, a building is being offered at a lowball price, you will know in advance that there might be something wrong with it; you might be able to get a deal or there might be things going on with it that would be unacceptable to you. You can do your research and find out why the price is so low.

Verify the Space

There’s a term for incorrect measurements provided by landlords: “Rubber rulers.” It’s that common. Go look at the space you are going to be leasing and measure it. Remember that spaces always look smaller without furniture…you really want to at least pace it out. If you are renting an office, you will also have a multiplying factor that covers your share of common areas. Look at this, too. Don’t agree to it automatically. Sometimes you may find it is out of proportion, especially if you have a smaller number of employees.

Landlords have also been known to include wall thicknesses, air shafts, etc as part of rentable space. Verifying the space is important both so you don’t overpay and so you know you are getting the square footage you have determined you need. If in doubt, hire an architect. This can be expensive, but it can save you money in the long term and, especially, save you from renting a space that turns out to be too small. Make sure they use a generally accepted standard.

Pick Your Battles

Any negotiation is a compromise. When you start negotiating, come armed with your list of must-haves and deal killers. However, don’t let the landlord know what’s on that list; if they find out what you really want, they can use that against you.

Look for compromises. If you absolutely must have assistance remodeling the space, then you might need to be willing to sign a longer lease. (If so, talk about a subletting clause.) There may be things you are willing to shift on and things you aren’t (don’t, for example, sign a catch-all operating expenses clause, but make sure it details exactly what it covers).

You need to know what those are, and where you are willing to compromise and not.

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Commercial leases are very complicated. If you have never negotiated one before, you really should consider professional help. A lawyer is a good idea, but what can also help a lot is a tenant representative who can guide you through things like space evaluation, needs assessment and rent research. A lot of this stuff is both tedious and outside of your likely field of expertise. Having an expert on your side is a good idea. You can be absolutely sure that your landlord will have a lawyer and experts to help negotiate the lease. Remember that landlords will always try to negotiate and close on leases in their own favor.

You should always come at negotiating a commercial lease as the complicated transaction it is, and know that everything is negotiable. The initial lease your landlord’s representative hands or sends you is a starting point for negotiations (and may have inaccuracies about space). Never sign the first lease, but always read through it, check for clauses you don’t like, and start working towards a compromise that is satisfactory to both of you.

How Long Should Your Commercial Lease Be?

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Signing a commercial lease is a huge decision. There are a number of factors that are particularly important, and top of the list is the length of your lease. Most residential leases go year to year, and negotiating a longer lease is often to your benefit. Commercial leases are different animals. They tend to last for a longer period of time, and there are advantages and disadvantages to short- or long-term leases.

How Long is a Typical Commercial Lease?

Commercial leases can run anywhere from one to ten years. Short-term leases are less common, and landlords prefer to sign long leases. It is often a challenge for them to fill the space when a tenant moves out, especially for storefronts and offices where heavy remodeling can be required before a new tenant can move in.

The length of the lease can affect what kind of deal you can get in a variety of areas, not just the amount of rent you pay or how much it will increase. Negotiating the length of a lease is a bit of a balancing act between your needs and your landlords’.

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Advantages of a Short-Term Commercial Lease

A short-term lease (three years or less) makes sense for some businesses. It has a number of advantages for the tenant (and few for the landlord). The two biggest are:

  1. You are not locked into a lease if your business fails. Even if you go out of business, you are still on the hook for rent for the rest of the lease term.
  2. You have more flexibility if the needs of your business change. You may need more space, or you may find you actually rented too much space.

A short-term lease can often, but not always, be renewed when the term is up if your business is doing well, but you have the ability to walk away easily if things are not going the way you planned. If the kind of space you need is easy to find and relatively small, it’s a low risk; you may have to move, but should easily be able to find a new space for your business.

Advantages of a Long-Term Commercial Lease

There are also advantages to signing a longer term lease, which include:

  1. Being able to stay in a space for longer without having to worry about moving.
  2. Many landlords will give concessions to tenants willing to sign longer term leases.
  3. You don’t have to refit your space as often or pay the costs of moving to a new location if your lease expires and either cannot be renewed or becomes unaffordable.

From this, you can see that there are trade-offs. Whether you want a short or long-term lease depends on the type of business you are running, the kind of space you need, and how established your business is.

For the most part, you want to sign a short-term lease for your first commercial space, when you are not sure whether you have a good business idea.

For offices, warehouses, and other businesses for whom location is not that important, short-term is better. This is especially true if there is a lot of suitable space on the market in your area.

However, if you are renting a storefront or a restaurant and are able to snag a particularly good location, then keeping that location may be worth the risk of signing a longer lease. Customers who get used to an outlet being in one place are often resistant about moving to a new location. Depending on patterns of foot and vehicle traffic, they may have problems finding your new place, which can result in customers going elsewhere. This is less of a concern for, say, a medical office than it is for a restaurant.

Alternatives and Compromises

It’s worth remembering that every aspect of a commercial lease is up for negotiation. Residential landlords tend to have standard leases from which they will not budge. Commercial landlords will negotiate every single clause, and will generally start by inflating everything, including the length of the lease.

Because of this, you may be able to negotiate a non-standard lease length. One good alternative, especially for stores and restaurants, is a short-term initial lease with the option to renew. There will generally be a rent increase on renewal, and some landlords may charge a fee for this option. If you are worried about your business’s survival, then a one or two year lease with an option to renew for three to five more years can be a perfect option.

Note that a long-term lease does not spare you rent increases; they are generally baked into the lease. However, they can spare you nasty surprises when you approach the landlord to renew. (Most landlords would prefer a tenant renew. But, it’s not uncommon for them to hike the rent at this point, especially if you have negotiated an agreed cap on increases during the lease term). 

Another advantage of a long-term lease is that it often makes landlords more willing to help cover part of the cost of necessary improvements and changes to the space.

One Final Consideration:

If you have special needs or need a lot of space, expect to sign a longer lease. Landlords are more likely to demand them. And, the risk of being thrown out of your space is much higher if your needs can’t easily be met elsewhere. It is also much harder to walk away when negotiations go poorly.

In short, the best length for a commercial lease depends on the risk you are taking. This is directly related to how new your business is, the kind of space you need, and whether the market in your area favors landlords or tenants. This is a complex process, and is only part of what you need to negotiate in a new lease; you also have to worry about who pays what in terms of utilities and damage to the building. For most people, especially those starting new ventures, it’s best to have a professional help you negotiate the maze (like one of our commercial real estate brokers) and get the best lease terms, including length, for your business.