Everything you need to know before Negotiating a Commercial Lease for Your Small Business
There are a lot of technicalities that go into finding a good commercial space for your small business. Those who have been in the industry long enough know that the process is so much more than just finding an ideal office space in an ideal location. It goes without saying that the terms of your lease can greatly affect the success of your business. As such,one of the most important and usually the most complicated steps when leasing a commercial business space is negotiating a lease that will favor the growth of your business.
With all the real estate jargon,a commercial lease can be intimidating for newbies. Nevertheless,you need to carefully analyze the document and understand even the most intricate details if you are to negotiate like a pro. Below are some factors you need to evaluate before signing a lease.
Square Footage
When it comes to commercial leases,most properties are billed on an RSF (Rentable Square Foot) basis. This means that as a tenant,you are expected to pay rent for the actual space occupied by your business; commonly referred to as Usable Square Footage (USF) as well as a certain percentage of the rent for the common use areas such as restrooms,corridors,and elevator lobbies: the latter is paid on a pro-rata basis. Understanding the distinction between USF and RSF will help you negotiate a good lease.
How do Commercial Leases Work?
As mentioned earlier,understanding the terms and conditions of a commercial real estate is paramount when looking for an ideal business space. Some of the aspects you need to familiarize yourself with before going into a lease negotiation include the term of the lease,the type of lease,and the availability of an termination clause among other things.
Lease Types
Leases are categorized depending on how the landlord chooses to pass on the building’s maintenance fees to the tenants. Listed below are the three main types of leases:
- Gross or full-service lease – This type of lease dictates that the landlord will pay for all the operating expenses including maintenance fees and property taxes while you are left to pay the agreed-upon monthly base rent. A gloss lease is very convenient for small businesses. However,you need to fully understand the extent to which the landlord is expected to pay the aforementioned fees as stipulated in the lease. For instance,you might be required to pay for the extra cost if your electric bill exceeds a certain amount.
- Net lease– The net lease is available in three different variations namely single,double,and triple net lease. For the single net lease,you are expected to pay the property tax on top of the monthly base rent while the landlord takes care of the remaining expenses. For double net leases,you will be expected to cover the tax and insurance fees on top of the monthly rent. Lastly,the triple net lease requires you to shoulder all the maintenance and operating expenses of the building in addition to the monthly base rent. If the building has multiple tenants,the operation and maintenance expenses will be shared on a pro-rata basis among all tenants.
- Modified gross lease– A modified gross lease,is a clever combination of both the net lease and the gross lease. Basically,it is a gross lease with a few additional responsibilities for the tenant. In most cases,tenants will be left to handle small individual expenses like electric bills and cleaning services while the landlord takes care of the bulkier expenses like tax and insurance.
During the contract negotiations process,it is important that you understand the type of lease you are agreeing to before signing your business into a binding contract. This will protect your business from legal wrangles that may result from a breach of the contract.
Lease Term
Long term leases are very popular because they are more friendly and flexible than short term leases. Also,most landlords tend to lean towards long term leases in order to minimize vacancies as much as possible. However,long term leases can prove to be a huge liability on your part as a small business owner on the off chance that your business outgrows the leased space halfway through the lease term. To prepare for such scenarios,you should negotiate a short term lease; say two years,with an option to renew.
Early Termination
There are so many changes and challenges associated with small up-and-coming businesses. This means that you might find yourself needing to terminate your lease before your lease term has expired. As such,you need to negotiate a termination clause that allows you to break the contract as smoothly as possible if need be. The Clause should include provisions like:
- The right to sublet your space wholly or partially in case you need to move to a new location or you are unable to cover the rent on your own.
- The ability to “transfer” the lease to someone else in case you sell them your business. This way,the new owner of the business will retain the original location until the end of your lease term.
Choose Your Neighbors
Did you know that you can decide who you want to be neighbors with when negotiating a commercial lease? An instance where this might apply is when you rely on a nearby business to bring foot traffic your way. In such a case,you can negotiate a co-tenancy clause which will allow you to forfeit the lease and move to a more favorable location if that business is closed down. You can also ask to include an exclusive use clause in order to prevent your landlord from leasing nearby spaces to your business competitors.
Commercial Lease Build Out
In most cases,a tenant will have to make a few changes to their new business space in order to get the most out of it. This is where a commercial lease build-out provision comes into play: the provision allows you to conduct various modifications and improvements to your leased space depending on your business needs. Some of the issues that the clause should address include:
- The extent of modifications to be made- Sometimes there is a limit to the level of modifications allowed.
- Who will pay for the improvements- If you are going for a short term lease,you’ll most likely pay for the improvements out of your own pocket!
- Ownership rights to the improvements- in most cases,the landlord gets the ownership rights.
- Whether or not you (the tenant) will be required to revert the space to its initial state at the end of your lease.
Seek Professional Assistance
Having prior knowledge about commercial real estate will help you negotiate an acceptable lease terms for your small business. However,it is advisable that you hire a reputable real estate broker to take you through the lease negotiation process and ensure that your business needs are met. The best thing about hiring a professional broker is that the landlord pays the broker’s commission meaning you get to enjoy an unbiased opinion from a professional without spending a dime.
If you would like more information about this feel free to contact our Austin commercial real estate company