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Home Resources How to Lease Commercial Property: The 6 Step Process
How to Lease Commercial Property: The 6 Step Process
This commercial rental application guide from Legal Templates helps landlords understand the application process and how to screen tenants.
Updated April 28, 2023 | Written by Jana Freer Reviewed by Susan Chai, Esq.
While commercial property owners desire the best tenants, tenants want to find the best commercial property that meets their needs and requirements for their business.
This guide helps tenants understand how the leasing process works and what they should expect as a business owner.
It gives information you may not know, including a checklist and tips for leasing a commercial property.
What is a Commercial Lease?
How to lease commercial real estate, essential details of commercial lease application, frequently asked questions (faqs).
A commercial lease is a legally binding contract between a landlord and a business tenant to operate a business from that property. Commercial lease agreements are used to rent any business-related property, including:
- Retail stores, shopping malls, etc.
- Medical centers, medical clinics, nursing homes, etc.
- Restaurants, cafes
- Bakeries, groceries
- Office buildings
Whether renting an office, retail space, or healthcare service, you should know the necessary steps to identify, negotiate, and sign a commercial lease.
1. Set your parameters.
Before starting your search for commercial space, it’s important to determine your specific requirements and limitations for the space you’re looking for. This might include factors:
- The size of the space you need: Choose a space that fits the needs of your business. You may need enough space and storage to conduct your business operations. For example, restaurants and offices are different types of businesses that need different usable workspaces. Therefore, determine the number of potential customers, the layout based on your business model, and the space size by considering the square feet per customer.
- The location you prefer: The location of your business is important for your interactions with customers. Evaluate the locations based on their ability to draw customers. Especially for retail businesses, choosing a busy and attractive location by considering local demographics, median income levels, and traffic volume plays an important role. Being in the right location can help you be more visible and grow your business.
- The type of property you’re interested in (e.g. retail, office, industrial, etc.): There are many different commercial property types. The most popular ones are industrial, retail, and office space. The property type you should rent depends on your goals and what you’re looking for in a property. Working in a building unsuitable for your business needs can cause problems. For example, if you run a retail business, your business should be in a location with a storefront. Therefore, y ou need to understand the characteristics and risks of your commercial property.
- Budget for rent: Determining your maximum budget helps you narrow your space searches to affordable ones. There are some key points for your commercial lease to remember when reviewing your costs. How much you pay per month, how much your rent will increase per year, and other lease terms like insurance, property taxes, parking, etc… Together with these lease issues, there are also build-out costs like utilities and additional improvements based on the type of your business. So, when determining your budget, consider all these variables.
2. Understand the area.
Once you know what you’re looking for in a commercial property, it’s important to research the area you’re interested in. This might include factors like the local economy, zoning laws, traffic patterns, and other relevant information. You can use online resources, such as real estate websites or local government websites, to gather information about the area you’re interested in. By doing your research ahead of time, you can make a more informed decision about which properties are right for your business.
- Research the area: Location is everything. While hunting for the best place, you should consider accessibility, security, demographics, foot traffic, competition, and growth potential. Some good business locations include industrial plants and warehouses for business parks, tourist attractions for hotel businesses, and the city center for coffee shops. For example, coffee shops need an urban location with foot traffic.
“In business, the wrong location leads to suffocation.” – Mokokoma Mokhonoana
- Learn more about zoning laws and nuisance laws: Zoning laws are regulations that control land use in a particular area. They affect your business operations as these laws maintain the characteristics of neighborhoods and protect public safety as well as determine what types of businesses are allowed in that area.
You also should research the nuisance laws; if you produce any noise or output, your neighbors could consider it a nuisance. You must ensure no research nuisance and environmental laws and regulations are against your business. For example, if you open a restaurant, there are no noise and smell ordinances to be able to operate your business successfully.
3. Hire a commercial real estate agent.
A real estate agent can help you find and negotiate the best possible deal on a commercial property. They have access to a wider range of properties than you might find on your own, and they can use their knowledge and experience to help you negotiate lease terms and other important details. When choosing an agent, look for someone with experience in your specific industry and location, and make sure they have a good track record of successful deals.
4. Offer a Letter of Intent (LOI).
A Letter of Intent (LOI) is a document that outlines the terms of a potential lease agreement. It’s not legally binding but serves as a starting point for negotiations between the tenant and landlord.
The LOI should include details like the length of the lease, the rent amount, any concessions or allowances, and other important terms to negotiate in the discussions moving forward. By presenting a detailed LOI, you can demonstrate that you’re serious about the property and has plans to negotiate in good faith.
5. Negotiate lease terms.
Don’t hesitate to negotiate the lease terms. Everything is negotiable. Once you’ve presented a Letter of Intent and started negotiations with the landlord, it’s important to carefully review and negotiate the lease terms. This might include factors like the rent amount, the length of the lease, any concessions or allowances, and other important details. Working with your commercial real estate agent and/or legal counsel is important to ensure that the lease terms are fair and favorable to your business.
- Rent increases
- Length of term
- Option to purchase
- Indemnity by tenant
- Commencement date
- Renewal options
6. Sign a commercial lease agreement.
Once you and the landlord have agreed on the lease terms, it’s time to sign a commercial lease agreement . This is a legally binding contract outlining the lease terms and conditions. Reviewing the lease agreement carefully and ensuring you understand all the terms before signing is important. Once you’ve signed the lease, you’re legally obligated to fulfill your obligations under the agreement, so it’s important to ensure you’re comfortable with the terms before committing.
Most landlords include the following essential details as part of their commercial lease application checklist. So, it is good to be familiar with these terms while seeking a commercial property.
- Name of the applicant’s business, current address, and how long the company has been at that address
- Contact information of any previous landlords
- Amount of rent the applicant currently pays or has previously paid
- Nature of the business and length of operation
- Names and contact information of all company owners
- Length of term the applicant wants
- Whether the company has ever failed to pay rent
- Bank the business uses and its contact information as well as bank statements.
- Names of business and credit references
- Permission for a background and credit check
- A business plan , financial statement, profit and loss statement, balance sheet, tax returns and income information
- Date and signature line
This crucial information helps inform the landlord about potential tenants and provides the details necessary to make an intelligent rental choice.
What can a landlord ask for on a rental application?
A landlord can and should ask for important information like contact information, authorization for a credit check, and business income information. This guide’s “Contents of a Rental Application Form” contains a complete list .
Also, landlords can ask questions regarding references and business history but may not ask anything violating federal or state law.
When is a commercial lease application used?
If you rent your properties to businesses , you should screen applicants with a commercial lease application. Not doing so could mean you rent to a tenant who lacks the ability and resources to pay, ultimately hurting your bottom line.
What are bank references on a rental application?
Potential tenants provide bank references to support their income, money in business accounts, and sometimes payment history.
A bank reference can be a bank statement or letter from a bank manager, and it is a helpful way to decide if a tenant will be the right fit for a commercial space.
Where can I find a commercial lease agreement form?
You can download a commercial lease agreement form at LegalTemplates.net or use our template builder to create a customized lease agreement form.
Landlords use our forms and builders to generate documents that fit their unique needs, such as commercial lease agreement forms for a restaurant space or an office rental application form for a law office.
Real Estate Editor
Jana Freer is a Real Estate Editor with Legal Templates, where she creates and edits legal form descriptions and articles to help landlords and tenants better understand real estate processes. She...
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What Financials Are Needed for a Commercial Lease?
There are several issues a new or existing business owner will need to tackle when considering a commercial real estate lease: Do I have the money to cover the length of the lease? What happens if my business isn’t as successful as I imagined? How far back would the landlord want to see my financials to determine if I am a good or bad risk? Will I need a lawyer or accountant to secure my new lease?
A business owner will want to carefully consider these factors and others before signing on the dotted line. Whether the lease involves a warehouse, retail space, or a simple office, landlords will want to see some specific financial and credit-history information about you and your business before cashing your check. This applies to both existing businesses and startups, because as in the case of any rental or lease (whether commercial or personal) the landlord wants to know if you can pay the rent.
It will benefit you greatly to present your financial situation in the best possible light in order to have a better negotiating position from which to work.
Want to know if leasing or buying a property is better suited to your needs? Contact Crown Point Commercial for the assistance you need!
There are several issues to consider before signing a commercial lease, and you must prepare your financial documents carefully before beginning this process. In the case of a startup company without a rental history or “paper trail” this is an extremely important factor. As with any legal consideration, when in doubt be sure to consult a qualified attorney.
If your business is a startup, landlords realize you probably won’t be collecting a profit for at least six months and possibly longer, and that you will have expenses in addition to rent such as inventory, payroll, and other financial obligations. Landlords typically require you to pay the first month’s rent, as well as a security deposit of no less than one month’s rent upfront, and may require more if you lack strong financials and credit. When presenting your financial situation to the potential landlord, keep in mind they are most interested in seeing what you will have left once you’ve covered all the upfront costs involved in the business.
Below are some typical requirements your future landlord will require before you can sign a commercial real-estate lease. These items are common to most leases but there are other specifics depending on the type of business you own and what type of space you plan to lease. Your landlord may ask for one or more of the following:
One thing to carefully consider is if you rely on a small-business loan for your funding, then you will most likely need a letter from your bank showing pre-approval for a specific amount of money that you can present to your future landlord.
Current credit reports/scores from all three reporting bureaus
Your credit scores are important for the landlord to know you have a good credit history and are likely to continue to maintain it.
Previous/current landlord references (for an existing business moving to a new location)
Just like a residential rental, your future landlord will want to know you have a history of maintaining your rental in the way the owner would for himself or herself.
Personal and corporate financial statement(s)
Most landlords require two years of financial statements. The financial statements need to include a profit and loss statement and a balance sheet. For a startup or sole-proprietorship, they will require the owner’s personal financial statement, since the business is basically you and whatever financing you have obtained in this regard.
A copy of your business plan
If you are an unknown entity, the landlord will want to see what your plan is to make money and become successful in much the same way as any lender.
Business bank statement(s)
These are designed to show you have the necessary funds to pay the rent both now and well into the future. Ideally, there would be sufficient funds to cover the entirety of your lease. It is important to the landlord that you will be able to pay the rent for up to a year until you turn a profit.
Prior tax returns
The landlord would typically want to see two years back for either your corporation or personal returns, or both.
To prepare for lease approval as a corporate entity, you will most likely need to present the following documents:
- Certificate of incorporation
- Articles of incorporation (with any amendments included)
- Bylaws (with any amendments included)
- Director names (all current directors must be listed)
- Officer names (all current officers must be listed)
- Certificate of good standing in your particular state in the case of moving your organization
- Corporate Resolution authorizing the Officer to execute the Lease Agreement
Limited Liability Company (LLC)
To prepare for lease approval as an LLC, you will most likely need to present the following documents:
- Names of current members and managers
- Articles of organization (with any amendments included)
- Certificate of filing
- Certificate of formation
- Names of current officers
- Good standing certificate (when applicable)
- Regulations (with any amendments included)
To prepare for lease approval as a General or Limited Partnership, you will most likely need to present the following documents:
- Name of the general partner
- Names of limited partners
- Partnership interest percentages (where applicable)
- Partnership agreement (and any amendments attached)
Starting a business and signing a commercial lease are very exciting, but it’s important to look before you leap. Make sure all your bases are covered to protect both you and your new landlord from disputes, misunderstandings, and legal wrangling before you move in. Make sure your paperwork is done correctly to save yourself a headache later on and hopefully you will enjoy a happy and successful commercial lease between tenant and landlord. Having your financial duck in a row prior to selecting a location also allows you to negotiate the lease terms from a position of strength.
GIDGET GRAHAM has over 25 year of real estate experience, from commercial investment properties (sale, lease and management) to residential and commercial development projects, land planning and zoning, to servicing her real estate clients providing the maximum return for investment and long term strategic real estate asset planning. She is current the President of Berg Builders; Managing Member / Broker of Crown Point Commercial Real Estate NV and Managing Member for Crown Point Realty Az. In addition, Mrs. Graham also holds management/ownership in several other entities and serves on Boards as an advisory Director.
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Property Leases: What SMBs Need to Know
Commercial leases are complicated. These tips will help you sort through the legal jargon.
- Research is the key to signing the right business lease. Specifically, look at the building owner, landlord, zoning laws, environmental expectations and nuisance laws.
- Know how much you have to pay, what exactly you’re covering and how much your rent will increase each year. Some leases include extra payments (e.g., utilities, insurance or maintenance), while others fold all of your expenses into one monthly lump sum.
- Establish details on how your lease will be transferred if your business closes or you move. Two examples are assignment of the lease, which allows another business owner to fully take it over, and subletting.
- This article is for business owners who are looking to lease a commercial space and want to ensure they understand the contract.
Signing a lease is an important step for any new business owner. Whether you’re opening a store, moving into an office space or renting out facilities for production, at some point, you’re probably going to have to reserve a space for your business. The world of commercial real estate can be complicated, and it can sometimes take years to find the space you’re looking for.
Once you’ve found that space, signing the contract could feel like an annoying final step before you can get moved in and focused on running your business. But like most legal agreements, a business lease is an important document that requires some research.
“You have to do a lot of planning when you’re moving from one space to another,” said Walter Gumersell, partner with Rivkin Radler. “Confirm the terms that you’re going to be taking.” For example, include clauses about rent, the security deposit, the term of the lease and the use of the space. “You want that to be as broad as possible,” he said.
It should be no surprise that the fine print in a commercial lease is very important. There are two basic steps to take before signing a lease: Do extensive research, and be aware of typical statutes included in business leases.
Steps for research include vetting the landlord, determining the building owner, researching zoning laws and getting a general feel for the area. Before you sign a lease, make sure you get an idea of the payment structure, your own personal risk exposure, the transfer structure, the landlord’s desired holdover rate and any nuisance clauses in your lease. These are some important things to look out for, but keep in mind that typical commercial lease practices vary by state.
Commercial lease vs. residential lease
A commercial lease is required any time a business rents a commercial property for the purpose of conducting business from that location. Nishank Khanna, chief marketing officer at Clarify Capital, said a commercial lease agreement is a legally binding contract between a landlord and a business tenant.
“The landlord agrees to rent out the business property, which is typically an office space, in exchange for money,” Khanna told Business News Daily. “Commercial leases typically last from three to five years, creating a long-term relationship between the lessor and lessee.”
Although this may sound very similar to a residential lease, there are some important distinctions between a residential lease and a business lease. For one, while both involve a landlord renting space to a tenant in exchange for money, a residential lease cannot be used for business purposes.
In addition, “commercial leases are less regulated and offer less protection than residential leases,” Khanna said. “They are typically longer in duration and offer greater flexibility when it comes to negotiating conditions than residential lease agreements.”
Another difference is that renters in a residential lease agreement are usually not responsible for paying property taxes, whereas with commercial lease agreements, it’s very common for the tenant to pay at least a portion of the property taxes.
Commercial and residential leases are similar, but there are some important differences, including how long the lease is and who pays the property taxes.
Elements of a commercial lease agreement
A commercial lease agreement is a contract, so it must include certain elements and key information for it to be valid and enforceable. At a minimum, information regarding the rent, security deposit, lease duration and any additional costs the tenant may be subject to should be clearly defined within the lease, according to Khanna.
“The ‘other costs’ category is an especially important one that should be carefully reviewed” before you sign the contract, Khanna said. “Building insurance, property taxes and maintenance costs fall under the ‘other costs’ umbrella. These additional expenses can quickly tally up to large overhead costs.”
Khanna also noted that small business owners should be aware of the difference between exclusive and permitted use. For small business owners in competitive industries, an exclusive-use contract can be especially beneficial.
“An emerging brewery, for example, would be wise to request exclusive permission to rent out space within a community market, in order to decrease opportunity for competing sales,” Khanna said. “Without exclusive permission, another brewery could rent space within the market and try to win business from the same pool of customers, thus reducing the first brewery’s profit significantly.”
There are several core elements of a commercial lease, such as the cost of rent, additional fees, the security deposit and the length of the lease.
Researching the area, landlord and lease details
Before you sign a commercial lease agreement , you’ll have to do some research. Make sure to take the following steps while investigating.
1. Understand the area.
While looking for a new property, if you’re selling a product or service to the public, analyze the area and get a good idea of your potential clientele. Location means everything for a small business to thrive , so when you’re shopping around for the right properties, take the time to find the right new home for your business. Gumersell said this process can take two years or even longer, so make sure you plan accordingly if your current lease’s end is in sight.
2. Find out more about the landlord and building owner.
Gumersell also said that one of the most important aspects of research that is often overlooked is learning more about the landlord and building owner. Sometimes, your direct landlord may not be the true building owner. Either way, find out as much about the landlord and building owner as possible. You’re entering a business partnership together, so make sure you have an idea of who they are, what their financial situation is and whether they’re making good on their payments.
In some states, for example, if a landlord fails to make his or her payments to the building owner, or fails to make mortgage payments to a bank, the business or tenant can end up getting evicted in the event of foreclosure – even if the business has been on time with every payment. That’s just one example of how the relationship between a landlord, tenant and building owner can go awry. Gumersell said businesses can conduct a public records search to find out more about the landlord. You can also request documents related to the landlord’s limited liability company or business entity to learn more about whether it’s an ideal partner for your business.
3. Research zoning laws.
Another component to look into is the zoning laws. While your landlord may designate your space for, say, running a restaurant, you have to make sure the landlord’s aims are consistent with the laws of your municipality. There are scenarios in which a landlord or building owner may think they can lease their space to a certain type of business, but it doesn’t match standard zoning laws in the area. By aligning these two details, you can ensure that your business can operate without any major legal headaches from the town or city in which you’re operating.
4. Learn about nuisance laws and the environment.
One of the most important aspects of signing a lease is being able to operate your business to its fullest capacity once you open your doors. Many leases have extensive points on noise, smells and equipment. Ann Brookes, a tax attorney, said that when she signed a lease for a restaurant, she had to negotiate an “offensive odors stipulation.”
“The building rules said no offensive odors,” she said. “Whether a smell is offensive is subjective, so I made sure there was an exception for smells ordinary to a restaurant.”
It’s also important to research basic environmental laws regarding the property before you sign anything, Gumersell said. Landlords often miss these laws, and they could be used against your business.
Before signing a lease agreement, do your due diligence on the property. Make sure to research the local area, the landlord, the zoning laws for the area, and any other nuisance and environmental laws the property is subject to.
Important commercial lease statutes to keep in mind
There are some key points to keep in mind when you are reviewing your lease. The rent structure is probably the most basic and most important aspect of any lease. By determining how much you pay per month, as well as how much your rent will increase each year, you can better determine budgets and get a full understanding of whether you can stay in business in this new space.
The lease terms are also very important. Consider short-term versus long-term leases. Long-term leases can be a great investment if you’re opening a business in an emerging or growing area, whereas short-term leases provide you with the flexibility to move locations or shutter your business if it doesn’t pan out in the way you hoped.
Both with payment structure and term, make sure you understand exactly what you’re on the hook for each month. Ask your potential landlord about how the following expenses are paid:
- Property taxes
- Maintenance (both interior and exterior)
- Local nuisance laws (noise or scent)
- Utilities (water, gas, electric)
- Modifications (whether you can adjust the interior or exterior of your space)
Once you’ve established some basic pricing and term structures, it’s time to dive into some of the less-obvious details. While your lease will likely vary by state, here are some good examples of statutes to be aware of before signing a lease:
- Transfer structure. Iron out how your lease will be transferred if you want to leave the space or your business closes. According to Gumersell, there are generally two structures for transferring a lease: assignment of the lease and subletting. Assignment of the lease means the entire lease is transferred to a new tenant. Subletting is when a current tenant keeps his or her name on the lease but receives payment from a new tenant and transfers that money to the landlord. In both instances, you usually have to establish prior written consent before the lease transfer. This is a very important aspect of your lease to work out.
- Personal exposure. In some cases, you may be required to sign personal guarantees when you sign a commercial lease. These agreements mean you’re personally on the hook for aspects of the lease even if your business defaults. Work with legal counsel to negotiate this aspect of your contract. If possible, you only want your entity or legal business to take on the risk when signing a business lease.
- Holdover rent. Holdover rent is a rent increase when a tenant stays after the lease has expired. It’s hard to find a lease, and sometimes when businesses are moving spaces, they end up staying longer than their current lease allows while the new one is being set up. In many contracts, landlords include a clause stating that, in these instances, businesses are responsible for up to 250% of their normal rent payment per month. So, if you stay beyond your allotted time, it could cost you tens of thousands of dollars. Gumersell recommended negotiating this aspect down to around 125%.
- Nondisturbance agreement. In many cases, if the landlord fails to pay his or her mortgage on the property, your business will still be evicted, even if you’re making all of your payments . With a nondisturbance agreement, if this occurs, you’ll be permitted to stay and continue paying whatever entity has taken over the building from your landlord, Gumersell said.
Everything can be negotiated
While these are some good examples of things to be aware of, there are likely many aspects of your lease that can be negotiated. Work with your potential landlord – and, if necessary, an attorney – to make sure you get the best deal for you and your business.
“Where a residential lease has a fixed term, a commercial lease is often negotiable and can have a longer or shorter-term depending on the conditions set,” said Allan Borch, founder of Dotcom Dollar. “Commercial leases also have fewer legal protections because the consumer laws that apply to residential lease agreements do not cover commercial leases.”
Don’t hesitate to negotiate the terms of the lease. Many aspects of the contract, especially the length of the term, are negotiable.
Commercial lease agreement terms to know
Borch and Dan Bailey, president of WikiLawn, listed some key terms that small business owners should know regarding commercial lease agreements. The list does not include every possible term you may encounter on a commercial lease agreement, but it’s an overview of the ones you are most likely to see.
Rent amount/base rent. This amount is calculated based on the square footage of the space. Make sure the number the landlord is using actually represents usable space. This rent is not dependent on revenue.
Usable square feet. This refers to the amount of space actually reserved for the business as a tenant, in cases of shared spaces.
Rent increases. Rent increases are usually based on a percentage of the total rent, and that can change from year to year. You can negotiate with the landlord to put a cap on rent increases.
Security deposit. This is the amount to hold the space until the paperwork is finalized. The amount should be specified both ahead of time and in the lease agreement.
Length of the lease. The length of a commercial lease is usually somewhere between three and five years, as commercial landlords prefer longer lease terms. The lease agreement also often specifies the start and end dates of the lease.
Improvements. This part of the commercial lease agreement lays out the types of improvements and upgrades that can be made to the space and who is responsible for the costs. Many aspects of this section can be negotiated.
Bottom line. Make sure you understand all of the terms in a commercial lease contract and are comfortable with them before signing on the dotted line.
Grant of lease. This is the clause that states that the landlord will turn the property over to the tenant once all of the conditions (e.g., paying the security deposit) have been met and the tenant accepts the property from the landlord.
Commencement date. This is the date on which the tenant takes over the property, more commonly stated as the first day the tenant becomes responsible for paying rent and maintaining the rental property.
Extension. Both parties can agree to an extension of the agreement in writing, and it must be signed by both parties.
Late fee. If the tenant is late in paying rent, they will incur a late fee that is outlined by the commercial lease agreement. This can be a flat fee or a percentage of the monthly rent.
Taxes. This section outlines all of the taxes associated with the property (property taxes, real estate taxes) and who is responsible for paying them. Within this section, there could be subtopics, like Contest of Taxes (the tenant can contest the amount of personal or real property tax they are responsible for paying), Payment of Ordinance Assessments (the tenant usually pays for all ordinary assessments, which are obligatory, and extraordinary, which are by choice) and Change in Method of Taxation.
Obligation for repair. This section states what types of repairs the landlord is obligated to make – like defects, deficiencies, failures or deviations in materials – that are vital to the operation of the property. It also outlines the repairs that tenants are responsible for.
Permits. Both parties are to acquire all necessary permits and licenses for making improvements or repairs at the location being rented.
Covenants. These terms are different for the tenant and the landlord; each has a separate set of covenants. For example, a covenant may state that the tenant is required to pay rent even if the landlord fails to uphold some of their responsibilities as stated in the lease.
Indemnity by tenant. This clause essentially removes all liability from the landlord in the event of injury, loss, claims, or damage, unless those things are a direct result of willful acts or omissions or gross negligence on the landlord’s part.
Rent abatement/adjustment. This section states if the rent will be adjusted or eliminated in the event of property damage from a fire or other natural disaster.
Condemnation. This clause is often overlooked, but it’s important. It determines what happens if the rental property is taken from the landlord by a government agency for public use, either by condemnation or eminent domain.
Option to purchase. This clause states that, at any time during the lease, the tenant has the right to buy the property at an agreed-upon price. This clause isn’t mandatory, but it doesn’t hurt to include it. The clause can also state that the tenant does not have the right to purchase the property during the term of the lease. Either way, it’s good to have it in writing.
There are a number of lease terms you should be familiar with, including usable square feet, commencement date, grant of lease, covenants and rent abatement.
Commercial lease FAQs
Commercial leases can be complex. Below are four of the most frequently asked relating to commercial leases and their answers.
What is a typical commercial lease deposit?
It is normal for the lease deposit to include a security deposit and two months of rent. The average cost is around $4,000, according to research done by a property management group in Houston.
Are utilities included in commercial leases?
The answer to this question depends on the type of lease. The utility needs of a skyrise office suite are quite different from a textile semiconductor manufacturing plant. To simplify the sheer range of leases that exist, most commercial leases are split into three categories. A gross lease covers all operating expenses, and that includes utilities. A net lease is less inclusive and usually does not cover utilities. A modified lease can be either a gross or net lease, with custom changes negotiated by both parties.
When should you buy or lease commercial property?
In the long term, owning commercial property is typically more economical than leasing. Leases are still popular because many businesses can’t devote a significant portion of their capital to commercial real estate. If a business can afford to tie up assets in commercial real estate, purchasing is the better option. If not, leasing is the way to go.
How long is a typical commercial lease?
Commercial leases are typically three to five years . That guarantees enough rental income for the landlords to recoup their investment. Leases are often negotiable, but for a commercial lease, landlords frequently allow customization of the space for the sake of the renting business. This means that landlords invest a lot more money into commercial real estate than they might for residential properties.
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Updated April 14, 2023
A commercial lease agreement allows a landlord to lease a space for retail, office, or industrial use. The tenant’s annual rent is based on the price per square foot ($/SF) plus any triple-net (NNN) expenses.
The timeframe (term) for a commercial lease is commonly 3-10 years with options to renew at pre-determined rates.
- Rental Application – Allows a landlord to verify the income and credit of a business and its owner.
- Personal Guarantee – Requires the tenant or 3rd party to be personally liable for the obligations under a commercial lease.
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What is a Commercial Lease ?
A commercial lease is between a landlord and a tenant seeking to rent space for business purposes. The annual rent is calculated as a price per square foot ($/SF) of the usable space with 1/12th due each month.
Unlike residential leases, landlords will sometimes charge the tenant additional expenses such as common area maintenance (CAMs) , real estate taxes , and insurance (depending on the type of commercial lease).
Types of Commercial Space (3)
There are three (3) main categories of commercial property:
1. Industrial Space
Industrial properties are warehouses and factories often located outside of the cities. Prime industrial properties will be close to major transportation routes and will be up to code for manufacturing purposes. The most common types of industrial properties include heavy manufacturing, light assembly, flex warehouse, bulk warehouse, and R&D facilities.
Office-related properties include a large subset of buildings used for business operations. They can be in the heart of downtown or on the outskirts of towns and suburbs. These properties have three categories based on their quality of construction and location (Class A, Class B, and Class C).
Retail properties are ideal for most shopping centers, restaurants, and small shops. These properties can make the lease a bit more complicated depending on the size of the building. The bigger the building, such as a shopping mall, the more likely that there will be multiple tenants renting out spaces for themselves. This will often include additional terms to negotiate how space will be blocked off for different tenants or if one business will have exclusive rights to the property.
How to Lease Commercial Space (11 steps)
- How Much Space is Available?
- Set the Price per Square Foot ($/SF)
- Lease Type: Gross or Triple-Net (NNN)
- Hire an Agent or Market Yourself
- List the Property
- Negotiating the Lease
- Conduct a Credit Check
- Approve or Disapprove the Tenant
- Determine the Security Deposit
- Write the Lease
- Taking Occupancy
Step 1 – How Much Space is Available?
In order to figure out how much is available for use, you will need to measure and calculate the square footage. This can be completed by multiplying the Length and Width of the interior usable space.
Step 2 – Set the Price per Square Foot ($/SF)
Select the monthly rent that you would like to charge the new tenant. Unlike residential property, commercial rent is described as a price per square foot ($/SF). When trying to figure the rental amount, it is a good idea to set a price that is close to what others are asking in your area.
Step 3 – Lease Type: Gross or Triple-Net (NNN)
When choosing what to charge the tenant a major question they will ask is if the rental amount includes the insurance , real estate taxes , and/or the maintenance of the property. This is very important and should be displayed when marketing the property.
Gross Lease – The tenant only pays the monthly amount written in their lease. The landlord will pay the real estate taxes, insurance, and maintenance on the property.
Triple (NNN) Lease – The tenant pays the monthly amount written in their lease along with the real estate taxes, insurance, and maintenance of the property.
Step 4 – Hire an Agent or Market Yourself
Now you will need to get the property listed. This lets other businesses and individuals who are looking for property aware of the availability. Therefore you will need to decide if you want to market the property yourself or to pay a real estate agent to market the property on your behalf.
Every real estate agent charges their own rates although it is the industry norm to charge between 4-6% total lease amount. 50% of the fee is paid upon lease execution and the other 50% is paid when the tenant takes occupancy. So if a lease is for 5 years at $1,000 per month the fee to the agent would be $2,500 ($50,000 multiplied by 5% = $2,500).
Popular Commercial Real Estate Companies
- Cushman and Wakefield
Step 5 – List the Property
If the property is being handled by an agent then you probably do not have to worry about the property being listed. If you choose to market the property yourself, then you will have to use the power of the internet as your sole source to getting the space occupied.
When adding your property it is best to have nice looking images of the interior and exterior along with any common areas. It is also important to write all the amenities, parking, water/sewer, and any other information that is necessary to the needs of a prospective tenant.
Popular Commercial Listing Websites
- OfficeList.com (for office space only )
Step 6 – Negotiating the Lease
When dealing with a prospective tenant it is best to understand their needs and come to an agreement. Therefore, it may be a good idea for you and your agent (if any) to get creative with the tenant in making a deal that works for both parties.
Example – Charge the tenant a percentage (%) rent of their sales rather than a higher monthly amount. Therefore, if the tenant makes money, you benefit as well.
Step 7 – Conduct a Credit Check
Unless you are dealing with an established company chances are that you will be dealing with an entrepreneur or small business. Therefore you will need to conduct a background and credit check to see their financial status.
Whether you’re checking a business or individual the best website to use is Experian .
Perform a Business Credit Check (Experian) – This will show the credit history of the company with details like how fast they pay-back their vendors and annual sales. Cost is $39.95 to $49.95 depending on the selected plan. View a Sample Business Report . The score will be between 0 and 100 with any score above 80 being credit-worthy.
Perform an Individual Credit Check (Experian) – It is best to also conduct a credit check on the owner of the business to view income and if they have any financial liabilities that could be separate from the business. Cost is $14.95 to the prospective tenant. View a Sample Individual Report .
Step 8 – Approve or Disapprove the Tenant
It is now time for the landlord to make a decision on whether to approve or reject the tenant. If rejected, the tenant should be informed through a Tenant Rejection Letter .
Personal Guaranty – If the tenant’s business is not credible then the landlord should consider having the tenant sign a Personal Guaranty which binds the owner of the Company to the lease. So if the tenant defaults the individual’s assets would be liable, not just the business.
Step 9 – Determine the Security Deposit
Once the tenant has been approved by the landlord the Security Deposit should be made known to the tenant. In residential real estate, there are State Laws that limit how much a landlord may ask from the tenant. In commercial real estate, there are no limits to how much the landlord would like to charge the tenant.
The landlord will commonly ask between 2-3 months’ rent in case the tenant stops paying the monthly rent or to safeguard against any damage that the tenant may cause during their time on the property.
Step 10 – Write the Lease
Use an attorney or draft the lease yourself. Make sure to gather all the information about the property and the tenant and enter into the agreement. Once completed, the document should be signed with the tenant and landlord in the presence of a notary public .
This way, the signatures are proven to be valid and the agreement is much more likely to hold up in court if its legality is ever questioned.
Step 11 – Taking Occupancy
After the security deposit has cleared and the lease has been signed the tenant should take occupancy. This means that the tenant can begin using the space as directed for use in the lease. Both parties will be held accountable for their specified duties until the end of the lease term.
Estoppel Certificate – May be requested by the landlord after lease signing to certify a lease exists between the tenant and landlord.
Americans with Disability Act ( 42 U.S. Code § 12183 ) – Also known as the ‘ADA’, requires that any commercial tenants which offer “public accommodation” (such as a restaurant, retail store, etc.) or have at least fifteen (15) employees adhere to all handicap access rules. This rule is only grandfathered to properties that have not been built or had renovations since 1992.
Per 42 U.S. Code § 12183 if the Lessee is using the Premises as a public accommodation (e.g. restaurants, shopping centers, office buildings) or there are more than 15 employees the Premises must provide accommodations and access to persons with disabilities that is equal or similar to that available to the general public. Owners, operators, lessors, and lessees of commercial properties are all responsible for ADA compliance. If the Premises is not in compliance with the Americans with Disability Act any modifications or construction will be the responsibility of the Lessor.
Hazard Waste ( 42 U.S. Code § 6901 ) – Forces the tenant to sign in writing that they will adhere to any federal, State, or local laws in regards to the disposal of hazardous wastes.
“Shall mean any and all federal, state, or local laws, ordinances, rules, decrees, orders, regulations, or court decisions relating to hazardous substances, hazardous materials, hazardous waste, toxic substances, environmental conditions on, under, or about the Premises, the Building, or the Property, or soil and ground water conditions, including, but not limited to, the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA), the Resource Conservation and Recovery Act (RCRA), the Hazardous Materials Transportation Act, any other law or legal requirement concerning hazardous or toxic substances, and any amendments to the foregoing.”
Other Lease Terms
In addition, there may be other areas of the lease, outside of the monthly rent, that the parties may want to negotiate such as:
Option to Renew – Use if the tenant would like to have the option to stay in the property for an extended period, then they may request an ‘Option to Renew’ the lease. This gives them the right to extend the lease for a specified rental price if they want.
Option to Purchase – Use if the tenant would like the option to purchase the property for a specified price during the course of their lease.
First (1st) Right of Refusal – If the property is for sale and goes under contract with a buyer, this allows the tenant the option to purchase the property for the same price. The tenant will usually be given 30 or 60 days to secure financing if they choose to purchase the property.
COMMERCIAL LEASE AGREEMENT
1. THE PARTIES . This Commercial Lease Agreement (“Agreement”) made on [DATE], by and between:
Landlord : [LANDLORD’S NAME], with a mailing address of [ADDRESS] (“Landlord”) who agrees to lease the Premises to:
Tenant : [TENANT’S NAME], with a mailing address of [ADDRESS] (“Tenant”), who agrees to rent the Premises under the following terms:
Collectively the Landlord and Tenant shall be known as the “Parties.”
2. DESCRIPTION OF LEASED PREMISES . The Landlord agrees to lease to the Tenant the following described space:
Street Address : [ADDRESS] Square Feet : [#] SF Type of Space : [ENTER TYPE] (retail, office, industrial, etc.) Other Description : [DESCRIBE]
Hereinafter known as the “Premises.”
3. USE OF LEASED PREMISES . The Tenant agrees to use the Premises for: (check one)
☐ – All purposes legal under law.
☐ – Only the following purposes: [ENTER PURPOSE]. Any change in the above-mentioned purposes of the Premises shall only be permitted upon the Landlord’s prior written consent.
4. TERM OF LEASE . The term of this Agreement shall be for a period of [TERM] commencing on [START DATE], and expiring at midnight on [END TERM] (“Initial Term”).
5. SECURITY DEPOSIT . The Tenant is: (check one)
☐ – Not Required to Pay a Deposit . There shall be no deposit required for the successful performance of this Agreement by the Tenant (“Security Deposit”).
☐ – Required to Pay a Deposit . The Tenant is required to pay $[AMOUNT] and shall be due and payable in advance of the Term or at the signing of this Agreement (“Security Deposit”). The Security Deposit shall be held in escrow by the Landlord in a separate bank account as security for the successful performance of the terms and conditions of this Agreement. The Security Deposit may not be used to pay the last month’s Rent unless written permission is granted by the Landlord.
6. RENT . The Tenant shall be obligated to pay $[AMOUNT] each month with the first payment due upon the commencement of this Agreement and each monthly installment payable thereafter on the [#] day of each month (“Due Date”) after the Initial Term (“Base Rent”). The Base Rent shall also be applied to any pro-rata period when the Tenant occupies the Premises for less than a one (1) month period.
a.) Percentage Rent . In addition to the Base Rent, Tenant shall be: (check one)
☐ – Not required to make payments related to Tenant’s sales or revenue (“Percentage Rent”).
☐ – Required to pay [#]% of [TYPE OF SALES] (gross sales, net sales, etc.). Such payment shall be made with a receipt and proof of calculation and paid each: (check one)
☐ Monthly ☐ Quarterly ☐ Annually
The Base Rent and the Percentage Rent shall be referred collectively to as the “Rent.”
7. LATE FEE . If Rent has not been paid on the Due Date, there shall be: (check one)
☐ – No Late Fee . The Tenant shall not be liable to pay a penalty for any late payment due under this Agreement.
☐ – A Late Fee . If the Rent is not paid within [#] days of the Due Date, the Landlord will charge a penalty in the following manner: (check one)
☐ – Flat Fee . The late fee shall be equal to $[AMOUNT] and applied each ☐ occurrence ☐ day until the Rent is paid in full. ☐ – Based on Interest . The late fee shall be equal to the Rent Due with interest accumulating at a rate of [#]% per annum and applied each ☐ occurrence ☐ day until the Rent is paid in full.
All late payments made related to Rent shall be first applied to the late fee and all remaining amounts toward the outstanding Rent amounts.
8. EXPENSES . In addition to the Rent, the Parties shall be obligated for the following expenses related to the Premises:
Landlord’s Responsibilities : [LANDLORD’S RESPONSIBILITIES]
Tenant’s Responsibilities : [TENANT’S RESPONSIBILITIES]
Shared Responsibilities : [SHARED RESPONSIBILITIES]
9. OPTION TO RENEW . The Tenant may: (check one)
☐ – Not Renew this Agreement .
☐ – Renew this Agreement . The tenant may have the option to renew this Agreement with a total of [#] renewal period(s) with each term being [#] year(s) [#] month(s), which may be exercised by giving written notice to the Landlord no less than 60 days prior to the expiration of this Agreement or renewal period thereafter (“Renewal Periods”).
Rent for each Renewal Period shall: (check one)
☐ – Not increase. ☐ – Increase as calculated by multiplying the Rent by the annual change in the Consumer Price Index (CPI) published by the Bureau of Labor Statistics by the most recent publication to the option period start date. ☐ – Increase by [#]% ☐ – Increase by $[AMOUNT]
The Initial Term and any renewal periods mentioned shall be collectively referred to as the “Term.”
10. LEASEHOLD IMPROVEMENTS . The Tenant shall be: (check one)
☐ – Allowed to Make Leasehold Improvements . The Tenant shall be allowed to make leasehold improvements without the written consent of the Landlord.
☐ – Not Allowed to Make Leasehold Improvements . The Tenant shall not be allowed to make leasehold improvements without the written consent of the Landlord.
11. GOVERNING LAW . This Agreement shall be governed by the laws of the State of [GOVERNING LAW].
12. NOTICES . Payments and notices shall be addressed to the following:
Name: [NAME] Address: [ADDRESS] Phone: [PHONE] E-Mail: [E-MAIL]
IN WITNESS WHEREOF, the Parties have indicated their acceptance of the terms and conditions of this Agreement by their signatures below on the dates indicated.
Landlord’s Signature : ________________________ Date: ____________ Print Name: ________________________
Tenant’s Signature : ________________________ Date: ____________ Print Name: ________________________
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Commercial Lease Agreement
Last Updated: June 2, 2022 by Elizabeth Souza
A commercial lease agreement is a binding contract between a landlord and a tenant for the rental of a property specifically for business purposes like office, retail, commercial or industrial space. This will contain the terms and conditions of the lease including the rent, term, penalties and allowed uses of the property.
Commercial Lease Agreements by State
Types of commercial lease agreements.
A commercial lease agreement allows the lessee to use the lessor’s property for commercial activity. The lease serves as a guideline for the date rent is due, the duration of the occupancy, and specific provisions that are required by law or agreed to by both parties. As there are no standard templates for writing a commercial lease, the terms of the lease will be unique.
There are several types of commercial lease structures available for business tenancies. The characteristics that differentiate (and categorize) these leases are based on their method of payment, gross or net. Commercial lease agreements include:
Gross Lease (Full-Service Lease)
A Gross Lease, or a Full-Service Lease is a commercial lease structure for lessees who want an all-inclusive lease agreement. The Gross Lease covers rent, operating costs, taxes, insurances, and utilities, through a single payment. The landlord pays for all expenses by charging the tenant a flat fee. This type of lease is most tenant friendly as there are no hidden costs, and the tenant can forecast their monthly and annual lease payments.
Modified Gross Lease
A Modified Gross Lease is a lease structure where the tenant pays their base rent plus an additional portion of the operating costs. In a Modified Gross Lease, the operating costs are both the landlord’s and tenant’s responsibilities, and these terms are negotiable and defined in the lease. A Modified Gross Lease is used when there is a common area shared between different businesses.
Furthermore, a Modified Gross Lease will most likely have an expense stop. This means that the landlord will cover the expense until a certain amount is reached and then it will be the tenant’s responsibility to pay for the remainder of that expense.
A Net Lease is where the tenant typically pays a base rent and the operating costs. Operating costs can include insurance, utilities, maintenance, taxes, etc. In a net lease, the tenant pays a lower price point for rent and shall assume responsibility for some or all of the property’s operating expenses. There are four types of Net Leases:
- Single Net Lease . The tenant pays for the base rent plus property taxes. The landlord is responsible for operating expenses, repairs, and insurance premiums. This is one of the least common commercial lease structures used but a landlord may prefer this to make sure that property taxes are paid on time.
- Double Net Lease. In this type of lease, a tenant is responsible for the base rent, insurance premiums and property taxes. The landlord typically pays for operating expenses, maintenance and structural repairs. Sometimes, a double net lease is called a “net-net” or “NN” lease. This type of lease structure is often used for multi-tenant buildings.
- Triple Net Lease . A tenant typically pays for the base rent, taxes, insurance premiums utilities and maintenance. A triple net lease is otherwise known as a “NNN” lease. This means that while the base rent is lower for the tenant, the tenant is also responsible for the monthly costs associated with maintaining the property. These expenses are added to the base rent monthly. Triple net leases are the most landlord-friendly and are used with large, single business spaces.
- Absolute Lease . The tenant pays for the base rent, major repairs and expenses (i.e., insurance premiums, tax, utilities, etc.).
A percentage lease is when a lessee pays a base rent (minimum rent) plus a percentage of the business’s gross income for the total rent payment. The landlord usually pays for property taxes, insurance premiums and maintenance. The percentage is negotiated between lessee and lessor and is clearly stated in the lease agreement. Restaurants and retail stores commonly use a percentage lease and pay around 5%-10%.
Commercial Lease Agreements by Property Type
A commercial lease agreement should be executed when a business owner wants to use a property to conduct business. Cost is generally priced per square foot, and this can include rentable square footage (which includes common areas) or usable square footage (space exclusively used for the business). Zoning and licensing authorities may divide commercial properties based on the business conducted on the property. Check with your local chamber of commerce or search online for zoning regulations using your zip code.
Commercial properties can be separated into types based on their purposes such as office, industrial, multifamily, hotel and hospitality, land, retail, mixed use, and special purpose. There are many types of commercial spaces to fit different business needs, let’s take a closer look:
Lease Agreements for Office Space
Lease agreements for office space are used for non-retail use and are classified as low, mid, or high-rise properties and are based on the number of stories the building has. These properties are grouped into one of three classes Class A, Class B, and Class C. These classifications can be entirely relative to the context of the property’s location, age, and surrounding market. Here is more information on office space leases:
- Type of Lease Agreement. Popular types of lease agreements used for office space include: a Gross Lease, a Modified Gross Lease or a Net Lease (Double Net Lease or Triple Net Lease).
- Common Leasing Terms to Negotiate or Include. CAM clause, Relocation clause, and Personal Guarantee Clause.
- Automatically Lease Renew. Not typically.
- Typical Length of Lease. The leasing term varies, and it can be from 6 months to a year or more.
Lease Agreements for Restaurants/Retail Stores
Retail properties include shopping centers, restaurants, and individually owned shops. The larger the property, the more likely there will be multiple tenants renting space for their business. The most common types of retail properties include shopping centers, community retail centers, power centers and mixed use. Below is more information on restaurant/retail leases:
- Type of Lease Agreement. Popular types of lease agreements used for restaurants/retail stores include: a Modified Gross Lease, Percentage Lease or a Net Lease (Double Net Lease or Triple Net Lease).
- Common Leasing Terms to Negotiate or Include. Competitor clause/Exclusivity clause, Insurance clause, Renovations/Repair clause. Restaurants might want to include a termination clause if permits/licenses can’t be obtained within the contingency period.
- Automatic Lease Renewal. Usually.
- Typical Length of Lease. The length of the lease depends on many factors; however, a typical restaurant/retail lease is approximately 3-10 years.
Lease Agreements for Multifamily Properties
Multifamily properties can serve as a residence, however, the general purpose of the property type is for investment. The multifamily classes include anything from a duplex up to a high-rise apartment building. Smaller properties are commonly purchased by new investors looking to make a profit on the property (by renting it out). Larger properties such as mid-and high-rise apartments and found in larger markets and are managed by sizable groups. Let’s take a look at the breakdown of lease agreements for multifamily properties:
- Type of Lease Agreement. In most cases, a Gross Lease will be used.
- Common Leasing Terms to Negotiate or Include. Lease renewal, Pet Policy, Alterations/Maintenance, and Subletting.
- Automatic Lease Renewal. Sometimes.
- Typical Length of Lease. Typically, one-year.
Lease Agreements for Industrial Properties
Industrial properties include warehouses and factories—and are often large spaces outside of town. Superior industrial properties are close to major transportation routes and are up to code for their unique manufacturing purposes. The most common types of industrial properties include heavy manufacturing properties, flex warehouse space, bulk warehouse space, and light assembly structures. Let’s look at a breakdown of lease agreements for industrial properties:
- Type of Lease Agreement. Popular types of lease agreements used for industrial properties include: a Gross Lease, a Modified Gross Lease or a Net Lease (Double Net Lease or Triple Net Lease).
- Common Leasing Terms to Negotiate or Include. Rent Escalation, Lease Renewal, Use Clause, Parking, and Environmental Indemnity.
- Typical Length of Lease. It depends but usually between 3-10 years.
How to Write a Commercial Lease Agreement
Below is a step-by-step sample of how to write a Commercial Lease Agreement.
III. USE OF LEASED PREMISES. 8. Insert a description of the use and purpose of the leased premises.
IV. TERM OF LEASE. 9. Insert how many years and/or months the premises will be leased to the lessee. 10. Add the date the tenancy will begin. 11. Add the date the tenancy will end.
26. Indicate the exact amount in words and write the exact amount in numbers of a security deposit that is due at the signing of the Lease.
27. Write the improvement exceptions that the lessee won’t be responsible for.
38. This section requires the notary public to acknowledge that they have met the lessor. 39. Have the notary public acknowledge that the lessee has appeared in person.
Commercial Lease Agreement Terms
Below are some common terms found within a commercial lease agreement:
- Americans with Disability Act (ADA) . The Americans with Disabilities Act (ADA) is a federal law that requires commercial tenants (and landlords) to adhere to all handicap access rules. Act 42 U.S. Code § 12183 states that if the lessee (tenant) is using the property as a public accommodation (e.g., restaurants, shopping centers, office buildings, etc.) or there are over 15 employees, the property must provide accommodations and access to persons with disabilities that are equal or similar to those available to the public. Owners, operators, lessors (landlords), and lessees (tenants) of commercial properties are all responsible for ADA compliance. If the property does not comply, any modifications or construction needed to achieve it will be the responsibility of the lessor (landlord).
- Common Area Maintenance (CAM) Fee. This cost is outlined in the lease agreement and usually broken down by square foot. It is the price the lessee pays to use common areas such as hallways, restrooms, or waiting areas.
- Exclusive Use. The lessor shall decide if they will give the lessee exclusive use of the property, meaning the lessee’s business would be the only business on the lessor’s property allowed to conduct that specific type of business.
- Escalation Clause. Long-term commercial leases typically require “escalations” or rent increases over a specified period—these can be negotiated and are outlined in the lease agreement.
- Lease Term. A leasing term determines how long the lease will be active. This includes the date the lease will begin and terminate and any renewal options/periods.
- Lessor . The property owner or landlord collects funds in exchange for leasing the commercial space.
- Lessee . The individuals or tenants who are paying the lessor a fixed amount of money in exchange for leasing the commercial space.
- Rent. The amount of money paid by the lessee. Commercial lease agreements specify the amount of rent due, when/where it’s due, acceptable forms of payment and any other expenses.
- Solvency . Describes the tenant’s rights if there is a foreclosure on the leased property.
- Zoning . Defines the zoning laws or other restrictions that apply to the premises.
Leasing a commercial property without written rules and expectations is an invitation for trouble. It is recommended to have your commercial lease agreement in writing.
Frequently Asked Questions
Useful landlord related templates.
Residential Lease Agreement
The information provided on this website does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available on this site are for general informational purposes only.
Business Financing | How To
How To Lease Commercial Real Estate: The Ultimate Guide
WRITTEN BY: Tom Thunstrom
Published July 27, 2021
Tom has 15 years of experience helping small businesses evaluate financing and banking options. He shares this expertise in Fit Small Business’s financing and banking content.
This article is part of a larger series on Business Financing .
- 1 Leasing vs. Buying
- 2 Set Your Parameters
- 3 Find a Broker
- 4 Types of Leases
- 5 Find the Right Property
- 6 Negotiate Lease Terms
A commercial real estate lease is an agreement that allows a business to rent commercial property from a landlord. Commercial leases come in three main forms: full-service leases, net leases, and modified gross leases. The process of identifying, negotiating, and signing a commercial lease is a long one. Knowledge of the necessary steps, which are discussed in detail in this article, will help business owners make a more informed decision.
1. Commercial Real Estate: Leasing vs Buying
First, it makes sense to decide whether to buy or lease commercial real estate . There are occasions when purchasing commercial real estate is advantageous. Specifically, the benefits of buying over leasing commercial real estate include:
- Building equity: You can use this equity as collateral for additional expansions.
- Owning an appreciating asset : Commercial real estate properties can increase in value over time, perhaps yielding a profit should you sell. However, assets can also lose value, making it an investment with risk that you need to consider.
- Depreciation of the building: You can claim the annual depreciation on your tax returns.
- Cash flow: Commercial spaces typically require owner-occupied businesses to occupy 51% of the building. However, you can rent out the remaining space and receive rental income.
It’s not uncommon for commercial buildings to be sold, which can leave lessees in the lurch. If you’re leasing a space that’s sold to another landlord, it’s possible that you might get kicked out of your space―this will be highlighted in the termination clause within the lease. If you own your own space, you’ll never get kicked out.
With leasing, tenants avoid down payments on a commercial loan, which can range between 10% and 25% of the property’s purchase price. Instead, they pay a refundable deposit that can equal up to six months of rent. Furthermore, lease payments can be deducted, reducing the tax burden.
By contrast, property owners can only depreciate the asset over its useful life. Owners can also deduct interest payments and origination fees if a commercial real estate property is financed.
Owning can be more stable than leasing. If you’re interested in buying a commercial property, read our article on the best commercial real estate loans .
2. Set Your Commercial Real Estate Parameters
Should you decide to lease, the next step is to set your property parameters as there is a wide range of commercial property available for businesses of all types. These parameters will help you limit your search to commercial spaces that suit your needs. Specifically, you’ll want to understand the following:
- Ideal customer or employee pool
- Commercial property zoning
- Desired size
- Maximum budget
Let’s look at each of these in more detail:
Ideal Customer or Employee Pool
Understanding your ideal customer is the most important property parameter if you’re a business looking to attract physical visitors to your location. Restaurants, retail locations, and similar types of businesses are good examples. These businesses should know where their ideal customers are located. A fast-casual restaurant may lease a commercial space in an area accessible to people who like fast-casual dining. Alternatively, a Michelin Star restaurant might want to choose another location in a more affluent area.
If you’re looking for office space , you’ll want to find a commercial space that’s convenient for your employees. You can conduct a similar analysis and find an area that’s highly populated by or easily accessible to your ideal employee pool.
Commercial Property Zoning
Commercial real estate properties are zoned for specific uses. For example, a warehouse is a commercial property zoned for industrial use. Other commercial zoning includes leisure, office, retail, and restaurant. The type of zoning dictates the type of business that can operate out of the commercial building. Make sure that you understand your local zoning laws as well as the type of zoning your business needs.
To do this, you can check with your local chamber of commerce or Google either your ZIP code plus zoning regulations or your city plus zoning regulations. We give you an example of commercial property zoning when we discuss the commercial requirements and best practices for storefront sign zoning.
The commercial lease options available are largely dependent on the size and layout of the space you need. To calculate the size, determine the number of customers or the size of your workforce to derive the necessary square footage.
For example, restaurants and retail locations typically require 15 square feet per customer on average. Meanwhile, offices typically require between 100 to 150 square feet of usable workspace per employee. Multiply the desired number of customers or employees by the appropriate square footage to yield the commercial space size that you need.
Another thing you’ll want to determine is your monthly budget. This will help you limit your searches to those spaces that are affordable. Your budget is largely dependent on your business’s size and performance.
Start by determining the average price per square foot for your area. Price per square foot is typically derived from the annual lease amount divided by the total rentable square feet of the space. You can find the average price for your area by typing your ZIP code into LoopNet’s directory of commercial properties available for lease.
Once you find the average price per square foot, multiply that by the square footage you need for your business. This should give you your expected annual budget for your commercial lease. Divide that by 12 to find your expected monthly lease payment.
Next, you’ll want to add up your expected utilities and common area maintenance fees (CAM) and include them in your max budget calculations. A good rule of thumb is that utilities average around $2 per square foot annually and CAM fees will cost between 20% and 30% of your annual lease payment.
You’ll also want to include expenses for any expected build-outs or annual rent increases. Examples of build-outs would include kitchen equipment in a restaurant or fixed shelves and walls in a retail establishment. The cost of build-outs is largely dependent on the type of business, but it’s possible to get the landlord to cover some of the costs. For rent increases, expect that your lease payment might increase 3% annually.
If you can keep your lease budget under 10% of your expected annual gross income, you should be able to manage the monthly lease payments and associated fees.
Accessibility is also a major parameter for retail businesses and restaurants. These businesses will want to have adequate parking for their customers. Furthermore, they’ll want to choose a location with a high amount of foot traffic and vehicle traffic and be compliant with the Americans with Disabilities Act (ADA).
3. Find a Commercial Real Estate Broker
Most commercial real estate leases are facilitated by brokers. Typically, there are two types of commercial real estate brokers involved: listing agents and tenant brokers.
Listing agents are hired by a landlord to list their commercial property. Listing agents earn a commission, typically paid by the landlord, of between 3% and 6% of the total lease. A listing agent has a duty to act in the best interest of the landlord.
Tenant brokers represent tenant interests. However, tenant brokers also typically earn a percentage of the overall commission paid by the landlord, known as the tenant broker’s fee. The tenant broker, while representing the tenant, doesn’t always have a duty to act in the best interest of the tenant. Depending on the arrangement, the tenant broker may act more as an objective third party.
When To Use a Tenant Broker
It’s not mandatory that a tenant use a broker. However, tenant brokers can typically help a tenant with the following:
- Lists of available real estate
- Accurate market pricing and comparables data
- Knowledge of local market conditions
- Access to financing options
This service is usually free to the tenant since the landlord typically covers the tenant broker’s fee. As a result, it’s a good idea to engage a tenant broker and have them help you find suitable locations to lease.
How to Find a Commercial Broker
Tenant brokers can be found online or through a personal network. One example website is The Broker List , which has an index of searchable broker profiles. You can search by name, company, or ZIP code. Alternatively, you can find a broker by asking your professional network.
Here are some 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 about the local market?
Specifically, you’ll want to find a broker who has the right mix of experience and attention. Once you’ve identified a broker you trust, you will likely sign a written contract. This contract usually stipulates that the working relationship is either exclusive or nonexclusive.
Exclusive Arrangement With Commercial Broker
An exclusive arrangement is where the tenant works exclusively with one broker for a period of up to one year. During this time, the tenant can’t work with another broker. A commission, equal to a small portion of the expected tenant broker fee, is negotiated between the tenant and broker and paid only if there are no tenant broker fees paid out by the landlord.
Nonexclusive Arrangement With Commercial Broker
A nonexclusive arrangement comes in two forms:
- Right to represent: A right to represent nonexclusive arrangement is similar to an exclusive arrangement except that a tenant is allowed to speak with other brokers. The tenant still pays a commission as they would with an exclusive agreement.
- Not for compensation: This arrangement is nonbinding and no commissions are negotiated. It gives the broker the right to speak on your behalf and schedule listings for you to see. While it provides flexibility, the arrangement gives the tenant broker less of a fiduciary duty.
How To Work Without a Broker
Remember that signing an agreement with a tenant broker isn’t mandatory. While a tenant broker is helpful, there’s always a small chance that you’ll end up having to pay a commission.
If you’d also like to look for commercial real estate properties yourself, you can find these listings on websites like the Commercial Real Estate Listing Service or LoopNet .
If you choose to look for yourself, you’ll have to find new listings, set up walkthroughs, and negotiate the lease without the help of an experienced broker. The only benefit of not using a broker is that there’s no chance of paying a commission. Otherwise, it’s probably best to use a tenant broker.
4. Understand the Different Types of Commercial Leases
There are three dominant types of commercial leases, with costs and fees assessed differently based on the type of lease.
A full-service lease is the most common type of commercial lease for office buildings. 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. In this scenario, the landlord takes on the responsibility of maintaining the property. There are also no hidden costs, and businesses can forecast their monthly and annual lease payments.
A net lease agreement is where the landlord charges a lower annual rent when compared to a full-service lease. However, landlords can also include monthly “usual costs,” which include such things as property taxes, property insurance, and common area maintenance items (CAMS). Net leases can be either a single, double, or triple net lease.
- Single net lease: A tenant pays rent plus a pro-rata share of the building’s property taxes.
- Double net lease: A tenant pays a portion of the property insurance in addition to rent and property taxes.
- Triple net lease: A tenant pays the pro-rata share of property taxes, property insurance, and CAMS. Triple net leases are the most landlord-friendly and are most common with restaurants and retail locations.
While the base rent is lower for the tenant with a net lease, the tenant is also responsible for the monthly costs associated with property maintenance. These expenses are typically added to the base rent monthly.
Modified Gross Lease
A modified gross lease is a compromise of the full-service lease and the net lease. A tenant might pay for their portion of their property taxes, property insurance, and CAMS, but they pay it as a lump sum payment along with their rent.
The rent on a modified gross lease is therefore fixed, and there are no hidden costs or unexpected charges. If any of the taxes, insurance, or CAMS increases, the rent remains the same. Utilities and janitorial services are covered by the landlord with a modified gross lease.
5. Find the Right Commercial Property
When considering different commercial property listings, make sure you assess the following in addition to your property parameters:
- Location : Make sure that the property is either around your ideal customer or ideal workforce. You’ll want to find a space that has adequate foot traffic and vehicle traffic as well as adequate parking for customers or employees.
- Amenities and services: You’ll want to understand the full range of amenities offered by the commercial space. These amenities and services may include such things as 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 will often dictate the type of amenities and services you require.
- Landlord history: This is important to understand since commercial leases are typically multiyear agreements. The landlord you choose will most likely dictate the lease agreement, changes to the agreement, rental increases, and more.
- Anchor tenants: Some multiunit commercial properties have an anchor tenant, such as Wal-Mart, Target, or other large chain retailers. If the anchor tenant leaves, the landlord might be able to get out of the property’s other leases legally. Make sure you know about any anchor tenants before you sign a lease.
Conduct Multiple Walkthroughs
You and your broker should identify multiple commercial spaces to view. This helps you get a better understanding of the average price and gives you a leg up during the negotiation process. During your search, you’ll also want to compare rents to ensure you’re staying on budget. A rule of thumb is that you should consider at least four commercial properties prior to signing a lease.
Walk-throughs are conducted with your broker and sometimes the landlord’s broker. With commercial spaces that require lease build-outs , bringing a licensed contractor along is a good idea as well. Build-outs may be fully or partially covered by the landlord. It’s important in this scenario that you get an accurate renovation estimate and negotiate a build-out into your lease.
Also, keep in mind that a creative broker may be able to develop other options that might offer advantages such as co-tenancy and lease term flexibility.
6. Negotiate Commercial Lease Terms
Once you’ve considered your commercial property options and their associated leases, it’s time to choose one or more commercial spaces and negotiate the leases. When formally entering into a commercial lease negotiation process, you’ll want to start by requesting the terms in writing. This request can come from you or your broker, and the terms are supplied by the landlord’s broker.
From there, you’ll want to write a business letter of intent (LOI) that represents your offer or counteroffer. The LOI is a chance for you to sell the landlord on why you would make a great tenant and is beneficial in a commercial real estate market with high demand.
Your LOI should include:
- 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 either the same as the terms proposed by the landlord’s broker or a counteroffer by you or your broker. The terms include the rental price and type of lease, but they also include more nuanced terms. You can counter any of these lease terms. If it’s a counteroffer, the negotiation process begins.
Common Commercial Lease Terms
Commercial leases often have similar lease terms. While the payment structure might differ, all leases include such things as the required deposit and lease length. Specifically, you’ll want to understand the following terms of your lease:
A commercial real estate lease is a long-term rental agreement between the landlord of a commercial space and a business. Doing research on where you want to lease space, finding the right broker to assist you, and negotiating the best terms will go a long way to helping you get the best possible lease for your business.
About the Author
Find Tom On LinkedIn
Tom Thunstrom is a staff writer at Fit Small Business, specializing in Small Business Finance. He holds a Bachelor’s degree from the University of Minnesota and has over fifteen years of experience working with small businesses through his career at three community banks on the US East Coast. In a prior life, Tom worked as a consultant with the Small Business Development Center at the University of Delaware.
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Retail Property Sub-leasing Business Plan
Start your own retail property sub-leasing business plan
Galerie de Beaute
Executive summary executive summary is a brief introduction to your business plan. it describes your business, the problem that it solves, your target market, and financial highlights.">.
Galerie de Beaute is best described as a mall of beauty professionals. Galerie de Beaute will lease fully equipped units to state-licensed beauty professionals.
Owners of traditional salons face many challenges when starting a new business. Purchasing equipment and finding a location in a high traffic area with reasonable rent is often difficult. Although 40% of beauty professionals own their own business, 60% are employed in a privately-owned shop.
In a traditional salon environment employees are paid 50% commission. These employees are often charged for supplies and products utilized. These issues sometimes lead to high turnover in the industry. Because of these challenges, salon owners have resorted to booth rental in those states in which it is legal. Although booth rentals are attractive to many; there are some drawbacks. To be considered a booth renter and not an employee by the IRS and the state, a signed lease is required. If an audit is performed and there is no signed lease, this could involve significant liability, including back taxes, interest and penalty.
A long-term loan or an additional investment will be sought to supplement owner investment. This will help Galerie de Beaute make the required leasehold improvements to the selected site. Leasehold improvements include installation of equipment, electrical, plumbing and carpentry required to construct 24 suites.
First year profit is estimated at $17,000 growing to $37,500 in year three.
- Establish Ourstate’s first salon mall
- Provide high quality suites
- Maintain long-term financial stability
- Provide access to a spectrum of beauty and personal-care professionals
- Maintain the highest levels of professional ethics
- Foster a progressive environment, which attracts talented entrepreneurs
- Stay true to community commitment
- Galerie de Beaute will provide hairstylists, nail technicians and massage therapists the opportunity to operate a mini-salon with minimal start-up capital expenditures.
1.3 Keys to Success
- Salon malls have been established in several other states (i.e. Maryland, Virginia, Ohio and Nevada). Ourstate, and those immediately adjacent do not, as yet, have any salon malls.
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How To Negotiate Commercial Leases That Favor Tenants
Written initial terms, a counter offer, the initial negotiation process.
- Prepare An Offer or Counter Offer Letter
- List Your Terms in an Offer or Counter Offer
- Other Factors To Keep In Mind
How to Write an Offer or Counter Offer Letter
How to deliver an offer letter, frequently asked questions (faqs).
When you're looking to rent a commercial space for your business, don't rush in to sign the dotted line. Take your time to evaluate the space and the landlord's lease agreement to help you negotiate a commercial lease that works for you and your business.
- Protections for commercial tenants are restricted to the terms of their lease agreements
- Its important to have the lease as well as any counter offers in writing
- You can negotiate on many factors in addition to rent for a commercial lease
- Additional negotiating points include personal liability, exit clauses, and other expenses
If a landlord or leasing agent simply tells you the terms of a commercial lease , ask for something showing the terms in writing before you submit a counteroffer. If they are reluctant to offer a letter, ask for an email or a copy of the listing for the space (which will contain at least the basic leasing information).
Why is it so important to have initial terms in writing? A leasing agent acts on behalf of the interests of the landlord. If an agent either misunderstood or attempted in any way to alter the landlord’s directions, having terms in writing can show you a landlord that your counter offer was made in good faith based on information from the leasing agent.
There are more protections for residential tenants under law. Commercial tenants are bound by their lease contracts, so oral lease agreements may not protect you business.
It is also possible that you could misunderstand lease terms if they are not in writing. This could lead you to counter too high or too low based on information you misunderstood.
Another reason to have the terms in writing is that it allows you time to research more about the lease, to ask an attorney about the terms, or even to compare terms to any other leases you are considering. Asking for terms in writing is not in any way a legal commitment on your part to move forward. You always have the option of countering the terms or simply turning them down outright.
When you buy a house, you negotiate the price. A seller lists the house for the amount of money they would like to get from the sale, but almost always expects to get less. A buyer interested in purchasing a home will submit something in writing to the seller with a counter offer. In this case, a counteroffer is an offer to buy the home at a lower price than what the seller is asking. Simply stated, a counter offer is bargaining.
This is also true for commercial leasing. While some leases may truly be non-negotiable, for the most part, it works just like buying a home: a landlord or listing agent asks for one rent price (or set of terms) but allows some room for negotiation. In other words, in commercial real estate, it is almost always expected that the renter (or, lessee) will submit a counteroffer, so the landlord inflates the prices and/or terms.
Once you have expressed interest in leasing a space, some landlords will simply offer you a form that states the lease’s asking terms. These forms may have a response section or an attachment to complete where you can counter offer. Others may just offer a copy of the listing papers (an ad or flyer) with asking terms.
In most cases, however, it is in your best interest to submit a letter or other written form of communication with a counter offer. Why? Because in a letter you can include selling points as to why you would make an ideal tenant, tell the landlord about your business, and make the deal more personal.
For a hot property with multiple interested parties, a letter along with your counter offer can serve as a sales ploy to get the landlord to pick you and agree with your terms.
Negotiation may go back and forth, so be patient. A listing agent usually has some freedom to make decisions, but most likely will need to confer with the landlord. It can take time.
If you have not heard back on an offer in one to two business days, it is fine to follow up. But try not to appear desperate or overly anxious as this could affect the outcome of your negotiations. Remember, most listing agents want to move a property just as fast as s/he can so they usually do not need much nudging.
Preparing An Offer or Counter Offer Letter
Your counter offer should be presented from your business, not from you personally, even if you own a sole proprietorship. Your offer letter is a sales pitch. You are asking for different terms that are more in your favor, and you want the landlord to see you and your business as a good choice.
Your offer letter should, typically, include the following information:
The Person Liable for the Lease
Include the name of your business which includes the name you are legally established under, as well as any other names you are doing business under. Remember, if you are operating a sole proprietorship, from a legal standpoint you and your business are the same and even if you list your business on the lease, you might also be held personally liable for the entire lease.
Personal liability can impact your ability to exit the lease contract. Options to protect yourself include limiting the extent of the guaranty, providing substitute guarantors in the case of lease assignment or retirement, and limit extent of liability to the estate of the business owner.
Your Business Structure
If you are incorporated, tell where you are incorporated. If you are a tax-exempt organization state this in your letter. It is rare that landlords offer you freebies or perks to nonprofits just to get a tax write-off, but they may be more inclined to negotiate or lease to a noble cause. Additionally, understanding your own personal liability for signing a lease is important and will vary depending upon your business structure.
How Long You Have Been in Business
If your business is less than two years old, you may wish to also include a statement about your success, or future growth projections or a business plan. A landlord is not likely to rent to your business, without someone personally cosigning or guaranteeing the lease, if you cannot show that your business is doing well.
The Nature of Your Business
What do you do? Be brief and to the point. A landlord needs to know what you do in case there are any special considerations. For example, if you run a business that uses hazardous materials, has walk-in patients to a health facility, or stores items of excessive value, the landlord needs to know in case there are restrictions on the use of the property. What tenants do, can affect a landlord’s property values and insurance rates; so be honest.
Sometimes commercial rents are calculated based on a percentage of profits. The nature of your business will determine if that sort of calculation works for you.
Be sure to include a phone number where you can be reached, and if possible, and email address. If you can only be reached on certain days or during set hours, include this as well. If you do not respond to a landlord or listing agent in a timely manner, they may think you are not interested.
Your Proposed Terms (or, Counter Offer)
Be as complete and clear as possible.
Listing Your Leasing Terms in an Offer or Counter Offer
The best way to negotiate a deal is to have a clear understanding of what it is you are offering or willing to accept. If it is not in writing, it will be very difficult to prove later on that something was excluded from a lease that you thought was supposed to be included.
Putting things in writing may take a little longer, but it does offer you some legal protection if things go amuck later on down the line. If you are time-pressed and cannot mail a letter - deliver one. If that is not possible, a well-written email or an electronic document using DocuSign may suffice.
If you are not certain about a particular lease requirement ask for clarification — and try to get that clarification in writing.
The Length of the Lease
If you want to change the length of the lease terms, be clear. For example, is the lease you want is for two years with three, one-year renewal options (totaling five years); or a straight five-year lease with no renewal options? It makes a very big difference in how long you will be locked into a lease and how a landlord might feel about other terms you are asking for in a counter offer.
Most landlords prefer two-year or longer leases, but never hesitate to ask for a one-year lease. One-year leases may cost a little more, or have fewer lease renewal options, but you are locked in for less time. Unless you are a multi-million dollar company, it rarely makes good business sense to sign a lease that commits you to the space for more than two years.
If your business outgrows the space, you do not want to be stuck with a long lease. Or worse, if your business is struggling you may have a hard time breaking a long lease to downgrade to a smaller space.
Condition of the Property and Repairs
If you are asking for the space “as is” or if you need the landlord to make repairs or improvements first. If you are planning to renovate the property, briefly describe the proposed renovations. You want this included in a lease because often a landlord will offer some sort of incentive or “allowance” if you renovate certain types of properties. If you are unsure what allowances you might be offered for any renovations, keep things open. Offer to submit more detailed information about renovations for the landlord’s review to offer you some sort of considerations for improvements.
Also, iron out smaller details such as who owns the fixtures after the end of the lease or who is responsible to move furniture during the construction period.
Tell the landlord when you want to take physical possession (move in, gain access, or take responsibility for the property). In some cases, when the date you take physical possession may be different than the date, you will begin paying rent.
For example, you could ask the landlord for an occupancy date and rent start date of January 1, 20xx, but ask that the first month be rent-free. In this case, the lease would begin on January 1, 20xx and the landlord could write off the free month’s rent. The tenant would occupy the space for 12 months, and the lease would run for 12 months.
Another way of getting the same thing (a free month of rent) is to ask for an occupancy date of January 1, 20xx, with a rent state date of February 1, 20xx. It means the lease would begin one month from the date you move in, or on February 1, 20xx.
This type of negotiation only works in a space that is already unoccupied, and the landlord is eager to have someone move in because it favors the tenant. In essence, you not only get one free month rent, you get to 13 months of occupancy out of a 12-month lease.
Other Factors While Negotiating a Commercial Lease
Rent and useable area.
The price per square foot of the space you are renting may not be usable for your purposes. For example, the common areas such as the lobby or elevators are priced into your rent but may not be used by you all the time. Alternatively, there could be tight corners, small rooms or spaces that don't work for your business. So examine the layout closely to determine if you're getting what you're paying for .
Termination and Exit Clauses
As mentioned earlier, as a business its always good to have an option to exit a commercial lease. You should consider negotiating lease termination and exit clauses to avoid any surprises down the line. If not provided by the landlord, ask for details about lease termination such as what happens to security deposit or penalties for breaking the lease etc.
If you have to move from the property you're renting, terminating your lease is not your only exit strategy. Negotiating sublet and lease assignment terms for the space in your lease can give you some additional flexibility.
While tenants can be help responsible for some part of maintenance expenses, understand that capital expenses for operating the building are supposed to be paid by the landlord. Ensure that your lease clearly states expenses you are liable for as the tenant and the expenses that need to come out of the landlord's pocket.
While the tenants are not required to pay for the landlord's operating expenses, the landlord may pass off those costs to the tenant by increasing rent. You lease contract may protect you from big rent hikes.
The following is sample letter that can (and should) be revised to use as either an initial offer or counteroffer to lease a commercial space for your business. It is not intended to serve as a substitute for legal advice, but simply to show one way you can express interest in leasing a particular space.
Information in bold should be substituted with your own information and leasing terms.
(Insert Today’s Date) ( INSERT Name of Landlord or Listing Agent) Ms. Happy Landlord 123 Street Suite Z City, State, Zip Code Dear Ms. Landlord ; This letter is to express interest on behalf of ( INSERT name of your business), in leasing the property located at: ( INSERT complete address including street address, unit or suite number, city, state, and zip code). ( INSERT name of your business) is a ( INSERT type of business you own – LLP, partnership, sole proprietorship, etc.) that ( INSERT brief statement about what your business does). ( INSERT name of business) has been in operation since ( INSERT start date or number of years in business). Due to exciting growth, we need larger (or, additional, more suitable, etc.) facilities. (Note: even if you work from home do not offer this in your proposal letter. Try to avoid offering in this initial contact that you have a home-based business – it may make you sound small and unstable to a landlord.) After carefully evaluating fair-market value I (we) propose the following terms for your consideration: LIST ALL TERMS HERE including length of lease, renewal options, rent, added fees, type of lease, annual increases, etc. Anything you want to include or address in the lease detail in this paragraph. Be sure to include any renovations or repairs you want or need the landlord to make to the space, or that you would do yourself. Ask for free rent, furniture, extra parking – anything you might need to make the space work best for your business. I am excited at the prospect of leasing the above-mentioned space and feel that ( INSERT Name of Business) would be an asset to you. If you have any questions about this proposal of leasing terms, or out business, please contact me at ( INSERT phone number and best time call), or by email at: ( INSERT your email address). Thank you for taking the time to consider this offer. I look forward to a prompt and favorable reply. Respectfully submitted, (leave 2-3 blank lines for signing your name in ink) ( INSERT Your Name – initial caps) ( INSERT Your Title – initial caps) Note: If you include any attachments, or copy anyone else, the preferred way to show that in a business letter is after your signature, like this, and in this order: Respectfully submitted, (leave 2-3 blank lines for signing your name in ink) ( INSERT Your Name – initial caps) ( INSERT Your Title – initial caps) Enclosures: (List more than one on separate lines, indented) cc: Jennifer Barnes, Listing Agent
You can mail your offer letter, hand-deliver it, or send an email with an attachment that contains the offer letter. If you are still struggling with what terms to include, here are more articles with great tips and advice on negotiating the best terms possible!
Tips on Writing Your Offer Letter
- Remember that this is a business letter. Keep it clean, simple, and to the point but do not be afraid to use meaningful selling points to help win over a landlord.
- Avoid using humor, slang, or offering personal feelings about politics, religion, or any other subject that is not related to the purpose of the letter (to make an offer).
- Use a software such as DocuSign to deliver electronic copies for documents. It helps with keep the documents secure and keep track of revisions.
- If you're sending the offer through mail, send it in a plain white business-sized envelope. Do not ever fold to fit the letter into a smaller envelope. Make sure to include a return address in the top, left-hand corner of the envelope, and make sure you have put enough postage on the envelope!
How do you calculate price per square foot for a commercial lease?
Rent of a commercial property depends on its size and the demand for it. You can calculate the price per square foot of the property by dividing the total rent by the rentable area. The rentable area is not just the office space you are renting but may also include common areas such the lobby, stairways or elevators.
What does NNN mean on a commercial lease?
NNN or Triple net lease is a type of a commercial lease agreement where, in addition to the rent and utilities, the tenant agrees to pay for insurance, maintenance and taxes. Triple net leases are favored by investors as it lower the rent and gives them more flexibility to make changes to the property.
NYC.gov. " Commercial Leases: Strategies During Tough Times (or Any Time), " Page 4 and Page 8.
NYC.gov. " Commercial Leases: Strategies During Tough Times (or Any Time) ," Page 24.
NYC.gov. " Commercial Leases: Strategies During Tough Times (or Any Time) ," Page 14.
Harvard Business Review. " Before You Sign That Lease…"
Harvard Law Clinic. " Commercial Leases 101, " Page 39.
Harvard Law Clinic. " Commercial Leases 101, " Page 24.
Cornell Law School Legal Information Institute. " Triple Net Lease ."
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Why Commercial Landlords Require a Landlord Deck and What to Include
- Business Plans , Commercial , Joorney Updates
- 11 Dec, 2020
When applying for a commercial lease, potential landlords often require a brief business plan presentation known as a landlord deck . The landlord deck will be submitted with the lease application and is similar to a pitch deck in that it is an abbreviated version of your business plan, typically presented in slide format. In order to create a landlord deck that improves your odds of lease approval, it is important to understand why landlords require it and what needs to be included.
Why a Landlord Deck is Required
There are three main reasons that a commercial landlord requires information about your business:
1. To fully understand the purpose and commercial activity – Landlords want to know that their property is being used appropriately and this starts by understanding what your business does and how the land or building will be utilized. It also allows them to ensure your business will not interfere with any existing tenants or other property owners, individuals, or activities in the area.
2. To confirm the business can pay the rent – As with any rental or lease arrangement, landlords need to ensure that they will get paid. If your business has already been in operations, in addition to the landlord deck, they will also check your business credit. They may also view your personal credit, especially if the business is new.
3. To ensure other terms of the lease can be met – Unlike residential lease terms, which tend to be for a year, commercial leases are typically for longer durations–usually 5 to 10 years or longer. In addition to feeling confident that you can pay the rent, landlords want to know that you are likely to stay for the duration of the lease. In order to protect themselves, they will often impose steep penalties if a lease is broken early.
What to Include and Why It Matters
Every landlord deck will be a little different but they should all include these fundamental elements.
- Business Description – A brief overview of the business, including what it does, how it does it, and size.
- Industry & Market Analysis – An overview of the size as well as trends in the overall industry and specific market. This gives landlords peace of mind that there is an appetite for your product(s) or service(s). This should also include information on relevant competitors.
- Marketing Plan – Your business can’t succeed if you can’t reach customers, so landlords like to see that you have a reasonable plan to attract initial (if applicable) and continued business.
- Management Profiles – Background and information on top management. The best business plan in the world won’t be successful if it’s not executed properly, so landlords want to know the business is in good hands. This also gives them an indication of the people they, or their representatives or employees, may deal with.
- Floor Plans/Use of Funds – Commercial spaces are rarely turnkey. They often require remodeling (a.k.a. leasehold improvements) to some extent in order to be functional for the new business. Landlords need to know how you intend to materially change the space as well as how you will invest your funds to do so.
- Financial Projections – This is arguably the most important part of the deck. If your business has already been in operation, you will include prior actual financial results. The actuals, if they exist, along with industry and market analysis, will help project future financial performance. This is one of the most relevant determining factors in whether landlords believe your business is likely to afford rent and stay in business for the duration of the lease.
The landlord deck can make or break your lease application so it’s important to get it right. In addition to business plans and other consulting and advisory services, Joorney offers professional landlord decks. Our team of skilled project managers, writers, and designers know how to create professional documents to appeal to the correct audience, in this case landlords, to help you secure the lease you desire.
Landlord Deck Samples
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The One Page Business Plan for Commercial Real Estate Agents
If you are working with a start-up business or new client, it is a simple way to help your client get focused and realistic about their budget and site selection options. You can click here to read it. The same principals apply to your brokerage business.
One Page Business Plan for Commercial Agents & Brokers
If you have ever written a formal business plan, you know they are often full of fluff and “pie-in-the-sky” five year projections. The following is a simple one page business plan you can use to quickly ask yourself the right questions and develop a plan based on your answers.
What is your Niche?
Your target market is just the starting point to determine your niche and ideal client. Your target market could be shopping center owners in Los Angeles. This target market is too broad. Narrow your market down further to create your niche. What type of shopping center? Do you specialize in a specific trade area or neighborhood?
Your niche may be single-tenant Walgreen’s in San Diego.
Define your niche: __________
Who is Your Ideal Client?
There are many property types and even more types of property owners.
How do you describe your ideal client? Do you want to work with institutional owners? Are you fluent in a second language and want to work with owners who speak that language? Do you want to work with owners that own “A” locations in high rent areas?
Using the Walgreen’s sample, your ideal clients may be doctors that own Walgreen’s in San Diego. The more you can focus on a narrow niche, the faster you will become an expert and own your market. When you are determining your niche make sure the market is large enough to support your sales goals.
Define your ideal client: __________
Size of Your Target Market/Ideal Customer
If you live and work in a small market you may need to broaden your niche to include a larger geography or expand your product type. Your niche may be owners of single-tenant Walgreen’s and Rite-Aid’s in Houston.
Define the size of your market: __________
What’s important to my ideal client?
Why do your ideal clients own commercial real estate? What are their biggest hopes, dreams and fears? The owner of a Walgreen’s is probably more concerned with limiting risk and minimizing management compared with a value-add investor who’s main goal is to maximize return and is usually more tolerant of risk. Understanding your client’s “wants” and “needs” is critical to effectively position your brand and services to prospective clients.
What are the pains, wants and needs of your client: __________
Who are your competitors?
Can you penetrate this market based on your competitors’ strengths and weaknesses?
Do the Math
Just as you cannot expect an investment property with bogus income and expenses to sell at the advertised sale price, you cannot expect to meet your goals if you do not understand the key numbers that affect your business.
Step 1: Determine number of transactions required per year
$_____annual income / $_____average commission = #_____transactions per year
Step 2: How many listings/assignments are required to reach # transactions goal?
#_____transactions / ratio of deals closed per listings = #_____listings required per year
Step 3: How many presentations do you need to make to secure a listing (close ratio)?
#_____ listing presentations to secure listing
Step 4: How many leads do you need to generate to secure a meeting (conversion rate)?
#_____ leads needed to secure meeting
1) Determine your Target Market
2) Narrow Down Your Niche
3) Define Your Ideal Client
4) Run the Numbers
Using the information above, you have defined your niche and created a profile of your ideal client. You have a good idea of how many prospects you need to reach and how many deals you need to close to reach your goal. You are now ready to develop a tactical plan of action to test your assumptions and modify your plan as needed based on the results. Future articles will discuss “How to Determine Customer Acquisition Costs”.
If you found this article useful, please leave a comment below and be sure to describe your niche.
Best of Luck!
Photo Credit: “Business Idea Concept” by 89studio FreeDigitalPhotos.net
Mark Chase is the founder of Restaurant Real Estate Advisors. Restaurant Real Estate Advisors provides restaurateurs with the ideal location and property owners with the expertise needed to market restaurant properties.
Mark is a licensed real estate Broker in the State of California. He has been featured as an innovator in commercial real estate by Business 2.0, Los Angeles Times, Los Angeles Business Journal, Daily News, California Real Estate Journal, Estates Gazette (UK) and KFWB Noon Business Hour.
great article, I love the way you simplify this business plan by the way did you also have marketing plan or any tutorials on commercial real estate
Mark this is a fabulous evergreen post and we are so proud to host it here. Wishing you a Happy Easter weekend too!! I just mentioned it in Quora too here: https://www.quora.com/How-do-I-become-a-top-producing-commercial-real-estate-broker/
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Commercial Real Estate Basics for Small Business Owners
Just starting out with a brick-and-mortar small business? Here is everything small business owners need to know about commercial real estate.
When you’re starting out with a retail , restaurant, or other brick-and-mortar small business , the time may come when you need to rent a commercial space in which to operate your business. Victoria Felix of Keller Williams NYC Tribeca conducted a webinar that explains commercial real estate basics for small business owners. This article contains almost everything you need to know in order to feel comfortable renting a commercial space for your business so you can get started with the commercial leasing process.
General Real Estate Terms
We will start with definitions of some common real estate terms so that when you speak with a commercial real estate broker, you can follow the conversation and know exactly what they’re talking about. If you’ve ever rented an apartment, these terms will probably already be familiar to you.
A lessor, or landlord, is the person granting the lease and who has legal obligations related to the lease contract. The landlord can be the property owner, property management company, or commercial leasing company.
The lessee or tenant is the person leasing the property or space. Although you may need to personally guarantee the lease, your business entity should be the official lessee on all documents relating to the lease.
A sublease is a lease between a tenant who already holds a lease and the sublessee who wants to use all or part of the tenant’s space. The tenant assigns certain rights they hold to the leased property to the sublessee.
The sublessee pays rent directly to the rightful tenant, or sublessor, to either share the space with the sublessor or take over the entire space or property.
The sublessor cannot legally assign rights to the sublessee that the sublessor does not have rights to in their own lease. Additionally, a sublessor cannot sublease unless they are permitted to do so in their own lease.
Terms Specific to Commercial Real Estate
There are some definitions you should know before contacting a commercial real estate broker that is not common knowledge.
Gross Square Footage
Gross square footage is the total square footage of the space being leased . This usually excludes common areas like a lobby or interior courtyard.
Rentable Square Feet
Rentable square feet is a combination of “usable square feet” and some portion of the square feet encompassing the common areas. Typically, there is a 10% to 15% difference between usable square feet and rentable square feet. In New York, that difference can be as much as 30%, so keep in mind that number may differ by geographic area. Rentable square feet usually reflects a higher cost than usable square feet alone. It usually is calculated by adding the usable square feet and some percentage of the common area within the building.
Usable Square Feet
Usable square feet means the square footage that is rented to be used exclusively by the tenant. It includes private (tenant-only) restrooms, closets, storage, and any other areas used only by the tenant.
The term “base rent” refers to the minimum amount due under the terms of the rent.
Addition rent refers to items that a tenant may be charged for that are not included in the usable square footage or other rent costs. These costs can include:
- After-hours services
- Common area maintenance (CAM) fees
- Percentage rent
- Utilities and water
- Any other costs not included in base rent
An escalation clause says how much your landlord can increase your rent each year. In New York City, the traditional increase is 3% of the base rent.
Many office and retail buildings start out with tenant spaces consisting of little more than four walls and a door. The idea is that the space will be finished to meet the specific needs of the tenant. The process of finishing this raw space is known as the “build-out.” There can be extensive negotiations between the landlord and the tenant over:
- What improvements will be made?
- Who will pay for the improvements?
- Who will be in charge of getting the work done?
- What will the tenant be permitted or required to remove at the end of the lease?
A lease assignment clause is a short document that allows for the transfer of the interest in a commercial lease from one tenant to another. In other words, a lease amendment agreement is used when the original tenant wants to get out of a lease and has someone lined up to take their place.
The tenant has the right to install and maintain an exterior sign on the building premises bearing the tenant’s name (the Exterior Signage.) The design, size, specifications, graphics, materials, the manner of affixing, exact location, colors, and lighting shall be consistent with the quality and appearance of the premises and is subject to the approval of all applicable governmental authorities, as well as the landlord’s approval.
Outdoor or Sidewalk Seating
A business must have a Sidewalk Café License and revocable consent if it operates a portion of a restaurant on a public sidewalk. This license is usually governed by the Department of City Planning.
There are three types of sidewalk cafés:
Enclosed Sidewalk Café
An enclosed area on the public sidewalk in front of the restaurant is constructed predominantly of light materials, such as glass, plastic, or lightweight metal.
Unenclosed Sidewalk Café
An outdoor area on the public sidewalk in front of a restaurant that contains removable tables and chairs.
Small Unenclosed Sidewalk Café
An unenclosed sidewalk café contains no more than a single row of tables and chairs next to the building. The tables and chairs can occupy no more than four feet, six inches of the public sidewalk.
How to Determine the Square Footage Needs of Your Business
To figure out how much space your business needs to successfully operate, you should first make a list of activities and areas required by the business, such as retail floor space, a gift-wrapping area, kitchen area, storage (dry and cold) for example. It’s important to consult with an architect to make sure you take all space requirements into consideration before designing plans and beginning the build-out.
How to Choose a Commercial Real Estate Location
Research your desired market and clientele and find out where they live, eat, and shop. Make sure the area has a dollar per square footage that meets your budget. If you choose a building or neighborhood, make sure to know the businesses that are located in that area. Research who would be on either side of your storefront, who is across the street, and find out where your competitors are located. The traffic they bring to their business may visit your business as well. That said, if there is too much competition in close proximity, you might not want to or be able to get a lease there.
If your business requires equipment, such as kitchen equipment for a restaurant, consider the expense of starting fresh versus renting a space that’s already outfitted with some of the equipment you may need.
Consider parking and how much of a shared parking lot your business might need to use. Parking is a negotiated part of a commercial lease.
Commercial Lease Terms
In New York City, a retail lease of one to three years is acceptable. Leases are expensive there, and people aren’t often tied to a long-term lease. If you’re scouting a retail location where there is often significant turnover in businesses, the landlord might not want to grant you a five- to ten-year lease. If you are confident in your business concept, you might push for a five-year lease because you will probably be able to negotiate a lower rent depending on the area you’re servicing and the type of business you have.
A short-term or pop-up lease is for a seasonal business or other purposes for requiring a retail space short-term.
Types of Commercial Real Estate Leases
There are many different types of commercial real estate leases, but we will only discuss a few of the most popular here.
Gross Lease / Full Service
The tenant pays a flat rent amount, and the landlord pays for all property charges regularly incurred by the ownership of the property, including taxes, utilities, and water.
Triple Net Lease (NNN)
The type of lease includes property taxes, property insurance, and maintenance of the common area paid based on the square footage of the property you occupy.
Modified Gross Lease
A modified gross lease is a type of real estate rental agreement where the tenant pays base rent at the lease’s inception, but in subsequent years pays the base plus a proportional share of some of the other costs associated with the property, such as property taxes, utilities, insurance, and maintenance.
A modified gross lease is more popular with tenants because its flexibility translates into an easier agreement between the tenant and landlord. Unlike the NNN lease, if insurance, taxes, or CAM charges increase, the lease rate would not change. If those expenses decrease, the cost savings are passed on to the landlord. As janitorial service and electricity are not covered, tenants can better control how much they spend compared to a gross lease.
Before deciding on a location and signing a lease, compare similar nearby locations and compare the rent. Work with your broker to secure the information.
Evaluate the condition of the building as well as the space you intend to rent. Make sure the interior and exterior of the business—including systems like electrical, and plumbing—and the soundness of the building and the roof are in good condition and won’t hamper your business operations in any way.
How Long Does it Take to Negotiate a Commercial Real Estate Lease?
It’s important when starting out with a brick-and-mortar business to give yourself plenty of time to negotiate your lease before you plan to move it and open for business. For a new business, plan to give yourself up to six months to negotiate the lease.
For a renewal, start to think about whether you want to stay at that location up to nine months in advance of the renewal date so that you can start negotiating with your existing landlord. That way if the negotiation falls apart, you will still have time to relocate your business with minimal disruption to your operation.
Do You Need a Real Estate Attorney?
It’s highly advisable you have your lease agreement reviewed by a real estate attorney. Any oversight on your lease can ultimately cost you money in the end, over and above attorney’s fees. A real estate attorney may also help you negotiate more favorable terms, which could save you money or trouble in the long run.
An attorney can help you negotiate your personal guarantee. Before a bank lends money to a startup business, they often require that the business provides additional guarantees in case the loan can’t be paid off from the assets or cash flow of the business. A personal guarantee requires the individual to pay back a loan personally in the event of default. In the past, this requirement for a personal guarantee on a lease was not common, but since the recession of 2008, it’s become much more common.
The tenant improvement allowance is the amount a landlord is willing to spend so that the tenant can retrofit or renovate the office space. It’s usually expressed in a per-square-foot or total dollar sum. This amount is decided upon during lease negotiations.
Commercial Real Estate Broker’s Role
Consider your broker your advisor during the process of negotiating your lease. Commercial leasing brokers can help you rent retail stores, office spaces, industrial facilities, commercial condos, and other commercial real estate properties.
You want to make sure you are using a separate broker from your landlord because you don’t want to rely on someone as your advisor who has the other party’s best interests at heart when you’re trying to negotiate. Your broker will facilitate negotiations regarding all aspects of the lease terms. Their goal is to bring the parties, including the attorneys, to the agreement on all terms, leading to the closing of the deal.
Make sure your broker understands your product offering and target market. This will then determine your location, price point, and the basic physical requirements of your business. The tenant’s product and brand will determine the type of location, for example, a strip mall vs. a local commercial strip, and an urban commercial location vs. a suburban mall. This all depends on budgeting.
If you’re excited to open a brick-and-mortar business, it’s important to find a commercial real estate broker who you are confident can help you through the process.
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What Every Small Business Owner Should Know Before Leasing Commercial Space
There is much more riding on your lease than getting a good deal on rent..
Leasing commercial space is probably one of the most important decisions you’ll make as a business owner. Choosing the right property on the right terms may be just as critical to your success as establishing a sound business model. Sure, getting a good deal on rent today is vital, but a well-crafted lease will ultimately protect your interests for the long haul.
With so much riding on commercial lease agreements, these documents can be especially complex. Why? Primarily because they establish a necessary relationship between landlord and tenant, covering a wide variety of terms and contingencies that have lasting financial implications for both parties.
So it’s not surprising this process is ripe for missteps if you don’t do your homework. No matter what size company you operate, it’s essential you get off to a good start. Engaging an experienced commercial real estate broker may save you time, money and headache, and can be critical to your bottom line for years to come.
Whether you’re a first time tenant or you’ve been around the block before and need a refresher, to help you better navigate the sometimes arduous leasing process we’ve outlined some of the most important items a small business owner (really, every business owner) should understand before entering into a lease agreement.
The Lease Proposal
Before you even get to the lease signing stage, your efforts to lease commercial space may typically start with a lease proposal. This is generally a non-binding agreement between a tenant and landlord that allows for some wiggle room prior to reaching an actual lease agreement, which would be more permanent. At this early stage, you will likely have all your financial statements ready, which may also include your business plan, to submit to the landlord for their consideration.
The purpose of a lease proposal is really two-fold. It serves to help the landlord understand your viability as a potential tenant. More importantly, your financial statements will help you define just how much you can invest in leasing a space for your business. An experienced leasing broker will assist you in preparing or organizing the needed materials, and they can also help you assess your financials to understand if the potential lease is right for your business.
The Lease Agreement
Understanding some basic but important terminology, in addition to the core elements involved in a commercial lease, will go a long way in getting you to the finish line. As we mentioned, lease agreements can be confusing, so we’ve put together a list of some of the most common terms and considerations.
The 3 Most Common Types of Lease Structures
The lease rent structure is often the component of a lease that causes the most confusion for tenants. There are three main types of lease structures, which we outline briefly below. However it’s important to remember that there can often be variations on these structures, and your agent can help give you a clear understanding of the lease that’s on the table.
Triple Net Lease (NNN)
In this form of lease structure, in addition to the base rent and utilities, the tenant is responsible for paying its share of all operating expenses associated with a property, including real estate taxes, property insurance and common area maintenance (CAM) costs.
In this case the tenant pays a set sum for rent, and the landlord pays the real estate expenses including taxes, insurance and CAM costs.
Modified Gross Lease
This type of lease is essentially a hybrid of a net and gross lease. The foundation is generally a gross lease, but the tenant will be responsible for certain increases in the operating expenses over the lease term.
Pros and Cons of Different Leasing Structures
Tenants typically prefer a Gross Lease, because the landlord cannot pass along the NNN expenses. On a Gross Lease, landlords will factor such expenses into the rent, so technically the tenant is still paying a portion of their rent to cover those expenses. That said, the tenant is usually shielded from any unexpected increases in the NNN’s, especially when a property is sold and the property taxes increase substantially, for example.
Somewhere in between is a Modified Gross lease, where the landlord passes along increases in NNN expenses only above an initial budget for those NNN expenses. The Modified Gross Lease is typically more attractive to a tenant than a NNN lease, but not as ideal as a Gross Lease. You should consult with your agent to determine the true costs of your lease in any of these lease structures.
Long Term Versus Short Term Leases
Long term leases.
While landlords tend to want long term leases, which create more stability for their portfolio and guarantee vacancy rates for a longer period of time, it may not be the best for your business. It all depends on the stability of your business and your potential for growth.
There can be distinct advantages for tenants to secure a five- or ten-year lease, as you will have your budget set for this investment over a longer period of time. However, if you find yourself in the situation where you need to move to a larger location due to growth, or worse, you have to close up shop, being locked into a longer lease could create serious financial challenges for you. Depending on the terms of your agreement, subleasing your space to another business may or may not be an option. Ultimately you may find yourself on the hook for rent that extends beyond the time you physically occupy your space.
Short Term Leases
This provides the most amount of room for growth and allows your business to be nimble with the possibility of moving after a year or two depending on the set amount of time for the contract.
However, when your initial lease term expires, you must be prepared for a variety of scenarios, and they may all come with higher rent and potential budget instability if you don’t plan properly. For example, your landlord may allow you to keep your space on a costly month-to-month basis, or you may have to negotiate a lease renewal with less favorable terms, or you may have to move if the landlord finds another tenant to pay a higher lease rate.
The point is, nothing substitutes a good long term plan and your experienced commercial real estate agent can help you understand the ramifications of leasing on a short or long term, and will likely be in the best position to negotiate your options.
Renewing, Expanding or Terminating Your Lease
As important as it is to establish the right lease terms, as we previously alluded to it’s equally important to factor in the “what-if’s” as best you can. What happens if your business out-grows your current location and you need to expand your space? What happens if the alternate is the case and you need to downsize or even terminate your lease? What if you simply want to renew your lease at the term’s conclusion?
You should have a clear understanding of the landlord’s requirements (or flexibility) in any of these scenarios, and having the details written into your agreement is advisable. For example, if you must terminate your lease prior to your lease expiration, what are the provisions? Does the landlord allow the leased property to be assigned or subleased? If so, what are the specific responsibilities associated with such a change?
Your agent will help you negotiate any penalties for the possibility of terminating a lease early, prior to finalizing and signing the lease agreement.
Making Changes to the Property with Tenant Improvements (TI)
Beyond slapping on a fresh coat of paint, commercial spaces often require more involved remodeling in order to suit them to the specific needs of your business. Negotiating Tenant Improvements (TI’s) can be an integral part of your lease agreement, but you must do your homework before signing your lease and implementing TI’s. This includes carefully considering what specific changes will be made to the property, determining the hard costs of such improvements, clarifying who will pay for them, who will own them upon completion, and whether the property must be returned to its original state before ending the lease and vacating the premises.
Therefore it’s imperative you have a clear understanding of the cost to construct your tenant improvements and the time it will take to complete them, before you sign the lease.
Other specifics to consider before signing a lease
While it’s nearly impossible to foresee every potential issue that could surface and impact your lease, you owe it to yourself to cover as much turf up front. Chances are your agent has seen enough in their career to know what other questions to ask or possible situations that could arise. For example, what happens if the property sells during your lease term? The type of lease you have will have a big impact on how the transition will be managed.
What are the impacts of parking, signage and location on your business? There may not be much flexibility with these items in terms of what the landlord can offer, but you still need to do your diligence. For example, is on-site parking limited or reserved, will your clients or customers have to park on the street and is that a problem?
Who are your neighbors? Tenant mix is important for any commercial real estate property, and it can have a direct impact on your business. If your business relies on foot traffic that is drawn by your neighboring businesses, ask about a co-tenancy clause that will provide some protection to your business in the event neighboring spaces are not leased within a specific amount of time after a vacancy opens.
Additionally, if you would rather not compete with other similar businesses, you can look into adding an exclusive use clause for your lease in order to protect your interests within the commercial property.
And a few things to have on your post-signing list
- Calendar the date of your annual rent increases and rent amounts
- Reconcile the triple net expenses on an annual basis
- Regularly compare your Estimated vs. Actual Expenses
- Calendar the date your lease expires as well as the date you have to notify the landlord should you elect to renew or extend your lease term
- Obtain current lease comparables from a local broker to help in your lease re-negotiations
Maybe buying is the better option?
Are you better off owning your building or leasing it? That’s the $64,000 question for many, and it’s an understatement to say there is a lot that goes into answering that question.
Owning your own property can be right for many people but for others it simply does not make sound financial sense. Among the many considerations, you must determine the cost to finance a commercial property from both traditional and SBA financing sources, and weigh the pros and cons on both types of financing. If you’re serious about it, you also need to do a full financial workup to compare the costs to buy the property versus leasing it. Take into consideration the tax benefits of owning a building. Buying can set your annual costs and provide additional equity with appreciation and the principal pay down of your loan.
The bottom line is there is a lot that goes into a commercial lease, and all of it will directly impact your company’s bottom line today or tomorrow.
We have outlined some of the core terms and questions you will need to consider as a part of your lease. You owe it to yourself to be armed up front with as much information as possible, whether going it alone or hiring a commercial broker. But the reality is for most people, navigating a commercial lease or a sale can be like learning a foreign language, and nothing substitutes having an experienced advocate in your corner who is fluent and focused solely on the task at hand.
For more information or for assistance in your leasing, buying or selling efforts, contact The Radius Team today .
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The baseball commissioner has a message for Wisconsin. Fix American Family Field — or else
Wisconsin's Legislature and Gov. Tony Evers need to approve a plan to finance $448 million of long-term renovations at American Family Field — or perhaps risk the Milwaukee Brewers moving to another city.
That's the indirect message delivered Thursday by Major League Baseball Commissioner Robert Manfred on a visit to Milwaukee − part of a series of visits Manfred makes to MLB cities.
To be sure, Manfred didn't explicitly say the Brewers might leave Milwaukee once the team's lease of American Family Field expires at the end of 2030. And the ballclub's principal owner, Mark Attanasio , has said repeatedly he wants the team to stay in Milwaukee for the long term.
But Manfred told reporters it's important that a ballpark funding plan be promptly approved by government officials.
And he cited the Oakland Athletics' ballpark, the publicly owned Oakland-Alameda County Coliseum, as a cautionary tale.
The Athletics are planning to move to Las Vegas under a tentative deal just announced by Nevada Gov. Joe Lombardo.
The team's move is being prompted in part by the Oakland ballpark's conditions. Major League Baseball in 2021 granted the franchise permission to pursue relocation after deciding the stadium was no longer a viable option for the Athletics.
Oakland's local government officials "made some unfortunate decisions not to maintain the ballpark in the way that it needed to be maintained," Manfred told reporters Thursday.
"It resulted in a decline in the attendance which had an impact on the quality of the product that the team could afford to put on the field," he said.
"This ballpark is an asset," Manfred said about American Family Field.
"I think the Brewers are interested in a long-term relationship and an extension of the lease that'll keep them here," he said.
Evers, a Democrat, in February proposed providing state cash for long-term renovations at American Family Field.
Separate GOP plan is being developed
Republicans who control the Legislature rejected Evers' proposal but have been negotiating a separate deal that has yet to be unveiled.
The ballpark is owned primarily by the state-created Southeast Wisconsin Professional Baseball Park District and is leased to the Brewers. The district is responsible for most major renovations under terms of that lease, which runs through 2030.
The renovations will cost an estimated $428 million over roughly the next 20 years, according to a study commissioned by the Brewers and reviewed by a consultant hired by the state Department of Administration.
That tab rises to $448 million with an inflation contingency. That covers such items as upgrades to the seats, concourses and gathering spaces − similar to what's been happening at other Major League Baseball stadiums.
Evers proposed a $290 million payment for American Family Field within his $103.8 billion budget proposal .
The $448 million cost would be covered by that payment, along with interest it would earn over several years as well as $70 million in state funds already set aside by the stadium district, according to the Evers administration.
In return, the Brewers would extend the lease to the end of 2043.
Evers says keeping the Brewers in Milwaukee would generate an estimated $400 million in state sales and income taxes over 20 years.
Assembly Speaker Robin Vos, a Republican, has acknowledged those tax benefits.
But Vos has suggested City of Milwaukee and Milwaukee County funding should be part of the stadium financing package − similar to the deal that helped pay for Fiserv Forum. Local officials aren't happy with that idea, noting that they're facing difficulties paying for such public services as police, sanitation and parks.
Also, both Democratic and Republican legislators have suggested providing state payments in separate two-year budget cycles − while also requiring the Brewers to extend the ballclub's lease beyond 2043.
Manfred said he was optimistic a financing plan will emerge.
"The governmental entities will find a way to fund that obligation," he said.
Todd Rosiak of the Journal Sentinel staff contributed to this article.
Tom Daykin can be emailed at email@example.com and followed on Instagram , Twitter and Facebook .
A commercial lease is a legally binding contract between a landlord and a business tenant to operate a business from that property. Commercial lease agreements are used to rent any business-related property, including: Retail stores, shopping malls, etc. Medical centers, medical clinics, nursing homes, etc. Restaurants, cafes Bakeries, groceries
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Commercial. Business Plans. Our professionally-written commercial business plans will increase your chances of getting approval for your SBA/bank loan, grant, franchise application, or commercial lease. With our experience in over 120+ industries, we know exactly what your audience is looking for. View Samples.
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A commercial lease agreement is a binding contract between a landlord and a tenant for the rental of a property specifically for business purposes like office, retail, commercial or industrial space. This will contain the terms and conditions of the lease including the rent, term, penalties and allowed uses of the property.
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The tenant would occupy the space for 12 months, and the lease would run for 12 months. Another way of getting the same thing (a free month of rent) is to ask for an occupancy date of January 1, 20xx, with a rent state date of February 1, 20xx. It means the lease would begin one month from the date you move in, or on February 1, 20xx.
When applying for a commercial lease, potential landlords often require a brief business plan presentation known as a landlord deck. The landlord deck will be submitted with the lease application and is similar to a pitch deck in that it is an abbreviated version of your business plan, typically presented in slide format.
1) Determine your Target Market. 2) Narrow Down Your Niche. 3) Define Your Ideal Client. 4) Run the Numbers. Using the information above, you have defined your niche and created a profile of your ideal client. You have a good idea of how many prospects you need to reach and how many deals you need to close to reach your goal.
How to Choose a Commercial Real Estate Location. Research your desired market and clientele and find out where they live, eat, and shop. Make sure the area has a dollar per square footage that meets your budget. If you choose a building or neighborhood, make sure to know the businesses that are located in that area.
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