Negotiating the proper lease for a commercial property can play an extremely important role in the success of a business. There is a lot more to negotiating a lease than just getting a low rate on the base rent. We’re going to take a look at some of the different parts of a commercial lease, what they mean and what can be expected.
Lease Type –
Typically, there are three types of leases. Gross Lease, Modified Gross, Net Lease, Net Net Lease, and Net Net Net Lease (usually referred to as triple net). Gross and modified gross leases typically won’t have hidden fees attached to the base rent. With net, net net and triple net there will be added fees for things like taxes, insurance and snow removal added to the base rent.
It is very important for a tenant to know what type of lease they will be signing before it’s time to put pen to paper. If there are any additional charges added to the base rent it is important to find out how much those charges are. Those can often times add up to thousands of dollars a month. The tenant will also want to find out what those charges are for and ask for a breakdown. How much are going towards taxes, insurance, lawn care and snow removal? They should verify what the taxes on the building are to make sure they’re not over paying. They should also get an idea of what insurance costs in their area or ask the Landlord to see the insurance policy on the building. If it doesn’t add up to the amount the Landlord wants to charge then the tenant should insist on a lower rate.
Rental Rate –
Many people think that Landlords will be willing to accept any amount of rent they’re offered just to get somebody in their building. In some cases this can be true, but most of the time not. It’s usually safe to offer an amount lower than what they’re asking and in many cases they will take it. It is, however, possible to offend them by offering too little. Many property owners are able to afford to let a property sit vacant for a little longer and may choose to deny business to somebody if they have offended them. Be reasonable when making an offer and be willing to pay what you think the space is worth to you.
Another very important part of a commercial lease is the length of the lease, referred to as the “term”. Many people new to commercial leases want to negotiate the shortest lease term possible. Many people even try asking for month-to-month leases or six month leases. While a short-term lease like this is beneficial if the tenant has definite plans to close or relocate in a short amount of time it can be detrimental to their business if they’re hoping to stay around a while. A lease term doesn’t just protect the Landlord from having their tenant move out soon, it protects the tenant from increasing rental rates and from getting kicked out to allow somebody else in who is willing to pay more. If a tenant is able to negotiate a fair rent amount it is usually in their best interest in lock-in that rate for as long as possible. With a short-term lease a Landlord may see that the tenant’s business is doing well and decide that they want to charge more rent at the end of their lease. At this point the tenant either has to find a new location and endure the stresses and expenses of moving or just pay the higher rate.
Depending on the type of business a person is looking to open in a commercial space, the property may not be designed to suit them. Many times a tenant has to come in and make improvements to the space to fit the needs of their business. This may include building or tearing down walls. The question that often arises here is who will pay for it? Tenants tend to think that the Landlord should pay for it if they want them to rent their space while the Landlord doesn’t feel they should have to make improvements specific to the tenant’s business. This is where some negotiating can really come in. The tenant should look for areas that they’re willing to give a little in order to get the expensive improvements taken care of. It may be worth it to pay $1 more per square foot over the length of the lease or to sign a longer lease. Landlords typically won’t want to reconfigure one of their spaces for somebody if they’re only committing to staying there for a year or two.
When a person finds the space they’re looking for and is ready to offer their terms they will write a Letter of Intent. A Letter of Intent is like an offer that somebody would write when purchasing a house, except that the Letter of Intent doesn’t obligate them in any way. It simply states the terms that they would be willing to accept to start moving forward if they wish, but don’t have to. This is where things such as the type of lease, the lease amount, the term and improvements will be laid out. It is important to not forget anything on this. Waiting for an acceptance only to go back and ask for more can really hinder the negotiating. The Letter of Intent will be given to the Landlord and will either be accepted, denied or they will make a counter offer. They will often say that they agree to one part of it, but not the other. For instance, maybe they will take the amount of rent offered but not willing to do the improvements. The future tenant now can either accept the counter, say “take it or leave it” or make some adjustments to their Letter of Intent and resubmit it. Maybe offering a little more in rent, a longer term or less improvements. In many cases this can go on for quite some time until everybody is satisfied.
The important thing to remember when negotiating a commercial lease is that everybody involved wants the transaction to go through. The Landlord wants to lease the space, the tenant wants the space and any brokers involved want the deal to go through. However, this doesn’t mean that anybody is willing to do whatever it takes to get the deal done. The Landlord wants to make a profit and the tenant wants to be able to afford their rent. Persistence is the key to winning and negotiation.