- 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.
- The most important thing you should do before you sign a commercial lease is to learn the language in it.
- Consider seeking out professional advice before you sign a commercial lease.
- This article is for first-time commercial lease signers or lessees who want tips about what to look for in a commercial lease.
The moment of 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. 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 committing 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
- Americans with Disabilities Act compliance
- Personal guarantee
- Amendment/modification/termination clauses
Tips for negotiating a commercial lease
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. You should know your company's current financial health – including cash flow, projected annual revenue and ability to assume risk – before moving forward with a lease. This ensures you understand what you can afford.
Some lessees may consider obtaining a commercial real estate loan to secure a commercial property for their business. As always, it's important to weigh the pros and cons of going into debt in order to grow your company. Be clear about the potential return on investment before financing the acquisition of commercial space. [Find out more about alternative financing with this small business guide.]
Tip: Leases are a long-term commitment. Understand how you will pay for a commercial lease by running realistic financial projections based on existing revenue.
2. Read up on real estate terminology.
Financial preparedness isn't the only factor determining whether you can lease commercial space. Even if you think you've found a perfect location that you can afford, 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. 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."
3. Don't try to do it on your own.
Even if you take a DIY approach to running your business, think twice about going through the leasing process alone. While working with an experienced real estate broker or lawyer may be an expense upfront, it can help you avoid 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."
Tip: Always hire a professional to ensure success. Accountants should help you with financial projections, while attorneys make sure contracts are aboveboard.
4. 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 types of 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. Net leases have their own options: single, double and triple net. A triple net lease is essentially 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.
Absolute NNN leases
Less commonly, there are absolute NNN (or bondable) leases, in which the tenant pays all costs of the building repair, including roofing, for example.
Finally, there are percentage leases, in which the tenant pays a percentage of retail sales in addition to base rent. These are most common in shopping malls, but can be found elsewhere.
Business News Daily editorial staff contributed to the writing and reporting in this article. Source interviews were conducted for a previous version of this article.