If you are new to the renting commercial real estate process, there are some terms and ideas that you should familiarize yourself with before you dive in. Understanding these leasing details, described in the article “Commercial Real Estate: What You Need to Know Before Leasing,” will help you enter negotiations with a little more confidence:
- Gross Lease. This is the most simple type of lease to understand, as all of your expenses are bundled up in the price per square foot.
- Net Lease. In a net lease, you pay for both price per square foot and for a specified amount of other property expenses. A double net lease includes insurance and taxes, while a triple net lease includes insurance, taxes, and maintenance.
- Percentage Lease. This type of lease is most common in retail spaces and requires you to pay base rent for square footage plus a certain percentage of your sales.
- Lease Length. Most tenants want a short term lease plus options to renew. This option allows you flexibility if you outgrow a space, but it also gives you the option of sticking with a space that is working well for you. However, keep in mind that landlords prefer longer leases, so a longer lease term might give you more negotiating leverage for something else.
- Other Expenses. Commercial leases are not like residential leases; in commercial leases the landlord is not necessarily responsible for property maintenance and fixing things like HVAC systems, for example. Make sure that you clarify in the lease who is responsible for what costs.
- Rent increases. Landlords will typically try to charge you annual rent increases, also called escalations, which are based on the consumer price index or a similar calculation. Be sure that you fully understand and are prepared to deal with these increases before entering the lease.
- Signage. If your business requires signs, make sure you discuss any regulations for posting signs.
- Subleasing. You as a tenant will want to push for the option to sublease your space if necessary. This offers you a bit of a safety net if you cannot pay rent or need to move to a different space.
- Build Outs. If you are planning on altering a space you need to talk to your landlord about what is allowed and who is paying for improvements. Sometimes if you sign for a longer lease term a landlord might be more inclined to help with the cost of build outs. Remember also that if you cannot use a space while it is being altered, you want to try to avoid being held responsible for rent during that time.
- Exclusive Use. An Exclusive Use clause prevents a landlord from leasing a nearby space to one of your business’s competitors, which might be especially important if you rely on foot traffic.
- Co-Tenancy. Sometimes properties have “anchor” tenants that other tenants depend on for foot traffic. If this is the case for the property you are considering, you might want to consider a co-tenancy clause, which gives you the freedom to end your lease if that tenant leaves.
- Assignability. If you need to sell your business, you will want to make sure your lease allows you to pass the lease along to the new ownership.
- Exit Plan. In the event that you absolutely have to break your lease, you will want to have negotiated for minimal penalties, such as only 2 or 3 months worth of termination fees.
Do research ahead of time to make sure that there are no surprises during your negotiations or later in your lease!