COMMERCIAL LEASES 101
I have been asked a lot of questions lately about the process of leasing commercial space and what steps should be taken for a business that is about to start the process of looking for new space. Here are a few of the questions, and my suggestions to clients.
When should I start looking for lease space? Often times it depends on the lease term you are looking for. If a client is looking for a 5-10 year lease term, I will advise them to start as much as a year ahead of the end of their existing lease. They may be looking for space that needs a custom build out and lead times are often 3-4 months once a lease is signed. It can take 2-3 months to negotiate the terms of the lease, so that leaves 5 months to get a feel for the marketplace and identify a few properties that would suit their needs. If a tenant is looking for a 1-3 year lease, the landlord often won’t give more than a month or two of free rent, so it really wouldn’t make sense to start the process more than 6 months before the current lease expired. Short term leases typically don’t have much build out, so there is about 2-3 months to see what is available and about 3 months to negotiate a lease on an acceptable space.
What information is needed to begin negotiations? Landlords need to know some basic information in order to be able to come to an agreement that will satisfy all parties. They need to know how long a lease the tenant is willing to do, what improvements will need to be done and which ones will be paid by the Tenant and which ones will be paid by the Landlord. If the tenant needs some free rent, either to offset moving or build out costs, or so they are not double paying rent until their current lease expires, the landlord would need to know how many months free rent they are asking for. These items would be written up by their realtor in a Letter of Intent (LOI) and submitted to the landlord for his or her consideration. Other terms that should be included in the LOI are parking requirements, who pays for maintenance of the building, taxes & building insurance, and any escalations in the rent throughout the term of the lease.
What should I ask for, once I’ve found a space I want? It is important to balance a tenant’s needs with a landlords costs. Tenants will often ask for discounts in rent, free months of rent and improvements to be made by the landlord to the property. The reality is the landlord needs to balance these requests and will often offer 2 of the 3, but the third must be paid by the tenant. By having a reasonable request to begin with, the chances of reaching an acceptable deal are much more likely. If the tenant needs cheap rent and 3 months free, it would make sense for them to pay their own build out. If they need an expensive build out and don’t want to pay it upfront, they should count on the landlord increasing the monthly rent above the asking rent, to offset the landlord’s cost of the build out. Good negotiations always begin with understanding the other side’s position in the matter.
What else should I think about? There are many factors that might come up during a lease negotiation and while searching for space. Some common ones include the need to check on zoning and see if any use permits required. In larger lease deals there may be exclusivity clauses with other tenants to be considered so that a competitor does not move in next door. There may be requirements for security deposits and/or personal guarantees and the landlord will ask for a credit check or company financials to make sure the lease is secure.
While every situation is unique, these are some good guidelines to help start the process of leasing. For specific questions on your own situation, please feel free to contact us.
-Dan Stiebel, CCIM