How to Negotiate a Commercial Real Estate Lease
Aug. 25, 2017
There are number of considerations for business owners involved in negotiating a commercial lease, not the least of which is the fact that the main objective of landlords is to maximize profits. By understanding the following fundamental concepts, it is possible to make a good deal.
First, understanding the market conditions for commercial properties is crucial. Generally, pricing is based on square footage, but there is a difference between "usable" square feet and "rentable" square feet.
Rentable square feet is the actual measurement of the space that is being leased. However, rates are typically quoted based on usable square feet which combines the space with a percentage of common areas such as lobbies, hallways, stairways and elevators.
In addition, commercial leases are considered "triple net." This means that tenants are also required to pay for taxes, insurance, and maintenance for a unit as well as a percentage of these costs for the common areas. By understanding these market conditions and the rate other businesses are paying for similar units, it is possible to negotiate the appropriate rate.
There are a number of factors involved with the term of a lease. For some businesses, such as retail stores or medical professionals, having a stable location is essential for attracting customers and patients, respectively. With this in mind, the term should be long enough to minimize rental increases, but sufficiently flexible to avoid getting locked in. This goal can be accomplished by negotiating terms of one or two years with renewal options.
Repairs, Maintenance, and Build-outs
It is also important for a commercial lease agreement to establish which party is responsible for paying repair and maintenance costs of the space, building and grounds. In some cases the tenant pays for insurance, custodial services and security costs unless the landlord agrees to pay for a portion or all of these expenses. In addition, if new space is being leased, landlords will often agree to pay for the costs of "buildouts" to customize the space, or offer the tenant a rental abate instead.
Options and Incentives
By establishing a track record of making timely rental payments, it is often possible to renegotiate the lease to obtain more favorable terms. Although a lease may contain renewal options, it may not be necessary to exercise them automatically. At times, market conditions may change, in which case a new lease should be negotiated.
The Bottom Line
In the end, business owners face a number of challenges, and negotiating a commercial lease can have a significant impact on the company's long term success. For this reason, it is essential to engage the services of an experienced real estate attorney.