Tips to Negotiate the Lease for Your Commercial Property
A lease for a commercial property sets the foundation for the business. The space can be used as an attractive storefront or as a permanent, physical place in which to conduct company operations. It’s important to negotiate the lease for the property so that the agreement is advantageous.
The entrepreneurial journey starts with signing the lease for a commercial space. A lease for a business property is complex, contains numerous variables and is long-term. While the agreement is a liability, it can also be an asset when negotiated favorably.
A lease details several major components, including the lease type or term as well as the amount of rent and security deposit. The document outlines permitted and exclusive use. Terms for maintenance, renovations and exterior appearance are included, as is subleasing.
Tip 1: Know the Different Lease Types
Business owners can expect to review and negotiate any one of five different types of commercial leases. Signing a net lease means the tenant pays for rent plus property taxes; the landlord covers the costs for maintenance, repairs, and additional incidental expenses.
In a double net lease, the business tenant pays the base rent and a portion of the property taxes, utilities, insurance premiums, and janitorial services. A triple net lease stipulates that the tenant pays for all costs associated with operating the building—making it most favorable to the landlord.
A percentage lease is one where the tenant pays the base rent plus a percentage of monthly sales, making this type of agreement common for multi-tenant retail locations. The fifth type is the gross rent lease, where the tenant and landlord split the costs equally to maintain the property.
Tip 2: Research Comparable Rents
Knowing the different commercial lease options gives the business owner an advantage during negotiations. Since knowledge is power, also gather information about the local commercial real estate market. Learn about costs of comparable properties in order to negotiate a fair price.
Tip 3: Determine the Length of the Lease
Long-term leases appeal to landlords, since they do not want to negotiate every year. Being willing to sign a long-term lease can result in lower costs. Business owners should consider going long-term to gain the upper hand at the negotiation table.
Businesses that benefit from long-term leases are those that rely on security and are location-dependent, such as restaurants. Short-term leases of one to two years are ideal for small businesses; a renewal option gives the tenant the chance to see if the location is a good fit and stay.
Tip 4: Uncover Hidden Costs
Negotiations are favorable when the details of all costs are made upfront. As mentioned, a gross lease includes all costs, while a net lease includes costs in addition to base rent. In most commercial leases, tenants are responsible for maintenance and upkeep costs of common areas.
A business tenant can estimate the costs of specific maintenance systems by learning about the conditions of those systems. Negotiate caps on the costs or higher rent in exchange for the landlord taking on all costs. Determine whether utility meters are separate or apportioned among tenants.
Tip 5: Request Favorable Clauses
Certain modifications benefit the tenant, such as a clause allowing that the property may be subleased should the company relocate or close. Ask the landlord to include a clause that restricts him from leasing out nearby spaces to similar businesses.
Negotiate a co-tenancy clause, which stipulates that the tenant may break the lease if a large, existing tenant that drives business to the company leaves. Be aware that prospective tenants may ask the landlord to be responsible for structural improvements before moving in.
Tip 6: Examine Termination Conditions
Reviewing the termination clause gives prospective business tenants an understanding of the circumstances under which they may terminate the lease. Negotiate an early termination right that allows a business owner to end the lease before the lease term officially ends.
A termination clause will be beneficial if the landlord sells the building, or the business grows at an exceedingly rapid rate and the business owner must move to a larger space. Without negotiating this clause, tenants who are forced to end the lease will be subject to contractual charges.
Tip 7: Utilize a Lawyer or Tenant Rep
Commercial leases are complex, making it wise to involve an experienced real estate lawyer or tenant rep. Legal professionals understand commercial leases and help business owners negotiate favorable lease terms and save costs in the long run. Tenant reps negotiate on the business owner’s behalf.
Negotiating a lease should be done right the first time, considering the agreement will affect the company in several important ways, including profit potential. Favorable negotiations impact rent, employee parking spaces, and other perks that can help the business run smoothly.
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