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Your First Commercial Lease: How to Prepare and What to Expect

Business News Daily Editor
Business News Daily Editor

Negotiating your first lease for office or retail space can be an intimidating process for new business owners. Here's how to make the process go smoothly.

  • A commercial lease should include the lease term and type, rent amount, security deposit details, permitted use clauses, exclusive use clauses and details about maintenance and renovations, as well as .
  • The most important thing you should do before you sign a commercial lease is to learn the language that's used.
  • You should also consider seeking out professional advice before you sign a commercial lease.

Signing a commercial lease is one of the biggest steps in a business owner's entrepreneurial journey. Whether you need a retail space to serve as a storefront or you just want a permanent, professional location to conduct business, a real estate lease can make or break your company, so it's crucial to get it right the first time.

"With a commercial property that will house your business assets and employees, there is a lot at stake," said Robert Bressman, a director of the real estate practice at law firm Goulston & Storrs. "Leases are long-term, with more variables and more complexity. A lease is a liability but can also be an asset."

What should a commercial lease include?

Keeping in mind that you should seek professional advice before you commit to a lease, here are a few of the major components to look for:

  • Lease term/type
  • Rent amount
  • Security deposit
  • Permitted use
  • Exclusive use
  • Maintenance and renovations
  • Exterior appearance
  • Insurance
  • Americans with Disabilities Act compliance
  • Personal guarantee
  • Amendment/modification/termination
  • Subleasing

If you've never negotiated a commercial lease, the process can seem intimidating and overwhelming. Bressman offered a few tips to help first-time lessees through this important business transaction.

1. Understand the full financial commitment.

Before you even begin looking at properties, you need to have a "big-picture" view of what this lease will entail financially, Bressman said. Business owners should know their company's current financial health, projected revenue and ability to assume risk prior to moving forward with a lease, to ensure they will be able to afford it. [Find out more about alternative financing with this small business guide.]

2. Read up on real estate terminology.

Financial preparedness isn't the only factor that determines whether you can lease commercial space. Even if you think you've found a perfect location that you can afford, you should read the fine print before making a commitment. For example, Bressman noted that a business owner should understand the differences among classes of commercial property (typically A, B and C) as well as the difference between "rentable" and "usable" space. Usable space is strictly the space you occupy and use for your business, but you may be charged more for the shared costs of the full rentable space of the building.

"Many additional items are incorporated into the lease agreement, including real estate taxes, utilities, insurance, and maintenance and operating costs of the building," Bressman said. "This can result in additional costs to the transaction [of] which business owners should be aware. In addition, the lease will need to include provisions for subletting, expansion and possible early termination."

There are plenty of online resources, such as PropertyMetrics and 42Floors, that can give you a basic overview of commercial real estate and help you learn what to expect.

3. Don't try to do it on your own.

If you're the kind of entrepreneur who takes the DIY approach to running your business, you may want to think twice about going through the leasing process alone. While it may be an expense up front, working with an experienced real estate broker or lawyer can help you avoid some easy-to-make mistakes and negotiate better terms for your lease.

"Business owners, particularly founders of small companies, can ... miss nuances and important terms in the documents, which is why a neutral, third-party advisor can help negotiate more favorable terms and know when and where to challenge existing offers," Bressman said. "It's also easy for business owners to get caught up in the way a space looks, rather than the terms of the lease, which can impact the space management, operations and financial obligation over the term of the lease."

4. Always think long-term.

You may not plan to stay in the space you're leasing forever, but Bressman reminded business owners to think about the long-term effects your retail or office building will have on your company's image.

"[With a lease,] you're also investing in your company's brand," he said. "Think carefully about where you want to establish your footprint and what type of image a certain neighborhood or facility conveys. Be sure that your legal and real estate advisors help you design a strategy that works for the future of your business."

How do commercial leases work?

To start, it is helpful to understand the terminology and the options. There are multiple options for commercial lease agreements. In a full-service lease, or gross lease, the tenant pays the base rent, and the landlord pays for the utilities, insurance, taxes and other costs of operating the building. This is where the "loss factor" of rentable versus usable space comes into play, because the tenant will be paying for a portion of the common areas as well.

In a net lease, by contrast, the tenants pay a portion of the operating costs of the building. Again, net leases have options: single, double and triple net. A triple net lease is basically the opposite of a gross lease, because the tenant pays not only rent but also the operating costs of the building. This should result in a lower rent but higher variable costs. Similarly, in a double net lease, the tenant pays for the utilities, insurance and taxes, but the landlord or property owner pays the structural maintenance costs. Finally, in a single net lease, the tenant pays the rent and utilities, but the landlord shoulders the cost of the insurance, taxes and maintenance.

Less commonly, there are "absolute NNN" leases, in which the tenant pays all costs of the building repair, including roofing, for example. Finally, there are percentage leases, in which a percentage of retail sales is paid in addition to base rent. These are most common in shopping malls but can be found elsewhere.

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