Figuring out how to lease an office space for the first time can be a detailed process, but it does not have to be overwhelming. When you approach an office space lease for the first time, here are a few components of the lease you should be prepared to consider, as outlined in the article, “How To Lease Commercial Real Estate”:
- Fees. Most properties will list their costs on a square foot basis either by year or month. However, it is important to know that your usable square footage – the space you will actually conduct business in – is different than the full amount of space you will be charged for. This is because you will also have to pay for usage of common space in a property – this combination of usable space and common areas is called rentable square footage.
- Types of Leases. Note that there are different types of commercial leases which will determine exactly what you pay for each month and how responsibilities are divided between you and the landlord. It is important to research which type of lease you have in more detail, but some common types of commercial leases include percentage leases, net leases, and gross leases.
- Landlord vs. Tenant Responsibilities. This will be partially determined by what type of lease you have, but it is important to make sure you clarify exactly who is responsible for what, including maintenance and repairs of HVAC units or other major appliances.
- Lease Term. This is an element of a lease in which landlords and tenants are often at odds. Tenants typically prefer shorter term leases so that they are not stuck in a space, but also with plenty of options to renew or expand in case they do want to stay and maybe add on a nearby space. But on the other hand, landlords prefer longer leases so that they do not have to replace tenants every few years. This means that if you are planning on a long term lease, you might have a little negotiation leverage with a landlord.
- Build Outs. If you need to somehow alter or renovate a space, this needs to be clearly negotiated upfront. Determine what changes you are allowed to make and who will finance these changes. Again, if you have a longer lease term, a landlord might be willing to contribute more to the cost of building out a space.
- Rent Increases. Landlords typically plan rent increases around the consumer price index. Increases are known as “escalations” and you should be fully aware of what these entail before signing your lease.
- Personal Guarantee. This is not a pleasant part of the lease for a tenant, but you will most likely have to sign a personal guarantee to lease the space, which holds you personally responsible for rent if your business is not able to pay. Landlords also like to do background checks on your personal finances to determine whether you will be good for the money. These typically are most important at the beginning of a lease, and you might be able to negotiate to have your personal guarantee expire after part of your lease.
- Exit Clause. If you do get in a situation where you need to terminate your lease, you will want to make sure you have determined a plan for this upfront, which means trying to negotiate for smaller termination penalties, for example, only a few more months of rent payments.
- Subleasing. It is always a good idea to try to negotiate for the option to sublease your space, which can really help your business if you need to move to another space or if you cannot pay rent.
- Assigning the Space. A more extreme option than subleasing is assigning a space to a new tenant altogether in the event that you need to move out. Some landlords do not allow this, but it is good to ask about in negotiations.
- Exclusivity Clause. If a big part of your customer base is foot traffic, you might want to try to negotiate for an exclusivity clause, which means that a landlord cannot lease nearby spaces to your competitors.
- Co-Tenancy Clause. Some properties have anchor tenants, which bring in a lot of foot traffic and can be a major selling point for smaller tenants to rent nearby spaces. If you know you are going to be dependent one of these anchor tenants to increase your business, try to negotiate for a co-tenancy clause which allows you to break your lease without penalty if the anchor tenant leaves.
- Start Date. It is important to make sure that your business is fully prepared to take on the responsibilities of the lease by the start date, which might mean that you need to ask for a start date that is different from when you sign the lease.
- Security Deposit. What a landlord asks for this can vary greatly from space to space, so it is important to be ready to negotiate this point.
Consider these factors as you search for an office space!