Basics of Commercial Leases
Choose and rent the best space for your business at the best price.
You may need more office space, or want to move to a different kind of business space. Perhaps your home business is bursting out of the garage and needs its own location. Whatever your reason for seeking to rent a space for your business, it's important to understand as much as possible about commercial leases to get the best space for the best price.
As you enter into the process of searching for and renting office space, the following pointers will help you.
Determining Your Needs and Setting Priorities
What kind of space do you need? Commercial space comes in a multitude of sizes and configurations, from the to-be-built building to a plain-vanilla office suite to a quirky older building. If you know what you're looking for, you can efficiently go after it.
Where do you want to be located? Being in one part of town may be important; but if it's not, you will have more to choose from.
Is appearance important to you? If you're dealing with the public, the outward show of the building will no doubt matter.
Do you want to be located near other businesses that complement yours? Sometimes it's a plus to be among your own (such as in the "high tech district").
What kinds of services do you want near your place of business? You may conclude that you and your customers or clients will benefit from certain close neighbors -- a dentist, for example, may want to be within walking distance of a special X-ray lab. For more information on deciding what is important for your business, see Choosing a Successful Location for Your Business.
Finding and Evaluating Space
Can you find a space on your own? In markets that are hot or sophisticated, you may need the help of a broker, who may have contacts that tenants won't know about. It's best to work with a broker who represents mainly tenants. Think very carefully before working with a broker who also represents the landlord -- such dual representation will rarely be to your benefit.
How does the landlord measure square feet? Believe it or not, it's perfectly acceptable to include the thickness of the exterior walls, and even the interior walls, stairwells, and elevator shafts, in square foot measurements. Make sure you know how your landlord computes your rented space.
Does the place require percentage rent? In a percentage rent situation, you pay for the size of the rental, plus a portion of your profits once they exceed a certain amount. In essence, you are sharing your income with the landlord when you reach that point of profitability. Large retail operations are typically the only tenants who pay percentage rent.
Is there expansion/purchase potential? Looking down the line, you may be thinking about the possibility of buying your own building. Be on the look-out for locations that offer a lease with an option to buy.
Developing a Negotiating Strategy
How much clout do you have? Your ability to secure a favorable lease depends on the state of the market. If there are lots of vacancies in your area, you'll stand a better chance of landing the rental on advantageous terms than if space like this is scarce.
Should you sign a letter of intent? Sometimes when landlords and tenants are in the midst of serious negotiations, they want to put their understandings down on paper -- but they usually don't expect that their writings will be the equivalent of a lease. A letter of intent is just that -- a communication indicating what the landlord and tenant would like to see happen in a lease. If the landlord asks you to sign a letter of intent, you should sign it to show you're serious about the space. But take care to make it clearly nonbinding, or else it can end up obligating you.
Are you aware that there is no such thing as a "standard" business lease? Unlike many other aspects of business, there are surprisingly few legal constraints on what tenants and landlords agree to do. Commercial leases can and should reflect the give-and-take between the landlord and tenant -- one size simply doesn't fit all. Even if the landlord starts with a form that's accepted by other tenants who lease from this landlord or printed and distributed by a big real estate management firm, it can always be modified.
Negotiating the Lease
Is the landlord asking for a "gross" or a "net" lease? In a gross lease, tenants pay a set amount per month, much like a residential lease. Depending on whether a whole building or part of one is being rented, the tenant will also pay all or a portion of the utilities. In a net lease, tenants pay for their square footage, plus a portion of the landlord's operating expenses, including the building insurance and taxes, plus utilities.
How long do you want your lease to last? Commercial leases typically last from two or three years to ten or fifteen. Only well-established businesses should commit to very long lease terms. For more information, see Commercial Leases: Negotiate the Best Terms.
Do you need a lawyer to review your lease? Paying for a few hours of a lawyer's time is usually a very wise move. The lawyer may spot potential problems that you may not have thought about. Look for someone who has represented you (or someone you know) successfully in the past, or ask other businesspeople whom you respect for recommendations.
For More Information
To learn more on how to analyze space needs for your business, find the ideal location and then get the best possible terms, read Negotiate the Best Lease for Your Business, by Janet Portman and Fred Steingold (Nolo).