Navigating the Commercial Lease Process
This is a guest blog post. My friend, John Heimbigner, wrote this in 2018. He graciously gave his permission to post in on my site. It is still very relevant today.
Determine Your Commercial Real Estate Needs
The first thing you’ll want to do is to take a serious look at your company’s needs in a new or first-time commercial real estate space. Depending on your location, there are likely hundreds of vacant spaces available within the major commercial corridors of the city, each with their own perks and drawbacks. Coming to the table with a list of basic requirements for your company will help narrow your search and better inform any real estate professionals you may choose to loop into this endeavor (more on this later).
Before beginning your search, consider the following aspects of your needs:
Property Type and Zoning
An easy first-step is to start by eliminating spaces that don’t accommodate your specific use-type. For example, if you’re looking for a traditional office space, there would be no need to consider a commercial space built-out for a restaurant. While this seems like a no-brainer, understanding how your company will want to use the space available to them is an important consideration before beginning your search. If your business has a unique service requirement, you may also need to check local zoning codes to learn more about the regulations and restrictions present in your city.
If your business relies on heavy foot traffic, you probably don’t want to open up shop in an industrial or up-and-coming development in your city. High profile businesses should always consider a city’s commerce or financial districts to ensure maximum visibility; however, smaller businesses or those utilizing warehouse space should also look further out from the city’s core to increase options and affordability.
If you rely on employees conducting business in the office, ensuring your new space is easily accessible to their commute and parking needs should be a high priority for you. If you’re hoping customers will wander by on foot and visit your store, for instance, you’ll want to make sure your space is easily visible and accessible on foot.
Employee Requirements and Perks
On average, most commercial office spaces should provide about 150-300 square feet of space per employee. If you’re like many startups or first-time ventures that have grown at a rapid pace, your employees are likely crammed together and uncomfortable in their current environment. If you’re planning to compete with employee-friendly heavy hitters common in the tech world, you’ll need to consider spaces with amenities like gyms, cafeterias, and shared communal areas as well as a location with plenty of space and parking.
Maximum Monthly and Annual Budget
Of course, the most important and crucial factor in your commercial real estate search will likely always be the overall cost of the lease. Look first at the cost per square feet – a common metric for commercial real estate leases – to determine how much you can afford over the course of a year and each month.
Using a Commercial Real Estate Broker
Before diving deep into your search, you should take the time to assess whether or not you need the help of an expert. Having a professional commercial real estate broker who specializes in tenant representation assist you during your search and negotiations can be incredibly beneficial – not only for guidance but in ensuring the best solution for you and your company’s needs. After all, a tenant rep broker’s fee comes out of the lease agreement at the end, so bringing someone on can only be a benefit to you.
Alongside working with a broker, many growing companies will also choose to appoint an operations or HR manager to provide the closest, most intimate knowledge of the company’s location requirements when conducting a commercial real estate search.
Types of Commercial Real Estate Spaces
There are five common commercial real estate use-types: office, retail, industrial, land and multi-family.
As a rule of thumb, it’s probably not the best use of your time to be looking for a restaurant space if you’re a tech startup or visa versa, so narrowing your search to properties that accommodate your desired use-type can be a big time-saving endeavor.
The Different Types of Commercial Leases
In general, there are three types of commercial real estate leases you’ll encounter once you have found the right property for your business:
Full Service Lease – The most common type of commercial lease used for office buildings. Full service leases mean the rent is all-inclusive, allowing for businesses to pay a flat rate on a consistent basis without having to worry about utility costs, repairs and maintenance, or property taxes.
Net Lease – Net leases typically cost less than full service leases, but could charge for common expenses like property taxes, insurance, or maintenance costs.
Modified Gross Lease – A mix between full service and net leases, modified gross leases allow tenants to pay for their portion of common costs in a lump sum. The difference is that these costs are fixed in the lease agreement, whereas in net leases the costs for tenants may increase as those costs increase for the landlords.
Negotiating Commercial Real Estate Leasing Terms
Once you’ve identified several potential properties, conducted walkthroughs, and learned more about the lease terms associated with each property, it’s time to choose your top properties and begin the negotiation process. It’s important to request each version of the terms in writing, which you can obtain through your broker. For each follow up offer or counteroffer, prepare a business letter of intent and deliver it to the landlord or their real estate broker.
While every letter of intent (LOI) is slightly different depending on who drafts it, the letter should generally include the following:
Your contact information, title, and business
The address and space of the property you intend to lease
Your proposed (or counter-proposed) terms of lease
The rental rate
A summary of any improvements, including any tenant improvement allowances
If you require many specific or nuanced terms to your commercial real estate lease agreement, the negotiation process could take much longer than you might think. However, because it’s important to remember that a speedy conclusion is in the best interests of both parties in the agreement, prioritizing your must-haves, medium-priority, and low-priority features, perks, or terms is an essential element of the negotiation process.
Should You Lease or Buy Commercial Real Estate?
If you’re a small business, growing into an additional space, or expanding your operations, it’s likely that your ideal commercial real estate space is a lease. However, if you’ve grown into a multi-million dollar venture or require very specific features to your company’s buildings, buying real estate outright can be a more attractive endeavor – if you can stomach a considerably more expensive initial cost and can eagerly anticipate routine upgrades, maintenance, property taxes, and utility expenses.
Now that you’re equipped with a greater understanding of the complex world of commercial real estate leases, you can start the fun part: the search itself! With so many incredible options in the modern commercial market, finding the perfect fit for you and your company should be an enjoyable and exciting adventure.