6 Tips for a Successful Commercial Lease
Contributed by Jenny Willardson
Are you looking to lease commercial space? Touring properties is just the beginning. A commercial lease can be very complex and the process challenging to navigate. Before asking the landlord where to sign so you can start choosing office furniture, consider these six tips for a successful commercial lease.
#1 The devil is in the details. Don’t sign a lease until you fully understand ALL the costs of holding the lease! Your lease could be a triple-net, full service, modified gross, percentage lease … Do you understand how each lease structure changes your costs? For example, if there are multiple units, who pays for the power for the exterior lights? Does your lease include a load factor to cover common area expenses? Is your leasable square footage greater than your usable square footage? Are premises utilities separately metered, pass-through, flat fee, or included in the price? It’s important to make sure responsibility for all operating costs is clearly defined in the Letter of Intent and the Lease Agreement.
#2 Can you terminate? Understand what would be required in the event you need to terminate your lease. Some tenants mistakenly expect (most likely because they didn’t read the whole lease before signing) that they can give a few months’ notice to their landlord to get out of their lease if needed. This is almost never true. In most cases, you would be on the hook for paying rent for the remaining months of the lease, even if you moved out. A good commercial broker can help you negotiate some terms into the lease that would act as a lifeboat if you needed to move on to another space.
#3 Negotiate Masterfully. Did you know that there can be up to 150 terms that can be negotiated in a commercial lease? Knowing this, you can craft the lease to best match your business’ needs. Each party has different motivations, and understanding what motivates the other party will help you get what you need. Perhaps by conceding in one area, you can get a concession from the Landlord on a term that is more critical for you.
#4 Read the whole lease before you sign. Every. Single. Word. Some commercial leases are easily 40 pages, but don’t you dare sign it until you’ve read it all. Don’t ever assume that something will be included, just because you think it’s “customary.” I read every word of my clients’ leases before they sign. You should also always have your attorney review the lease prior to signing.
#5 Get representation. A commercial broker is valuable to you for many reasons. They have insider knowledge on off-market and upcoming vacancies. They understand today’s market and can prevent you from paying more than you should. The landlord of any property that is listed for lease with a licensee on the MLS has already agreed to pay the fees of the tenant’s commercial broker, so it won’t cost you anything to be represented.
#6 This is not a home. The person who helped you buy your home is most likely NOT the right person to help you with your commercial lease. Little crossover exists between the skills and expertise needed for selling a home and the expertise required to negotiate a commercial lease. As a tenant, you need someone who works with commercial leases on a daily basis to get you the best terms based on market conditions. Your representation must be able to foresee pitfalls and negotiate in your best interest to avoid these pitfalls. Your broker also needs to be able to speak the language of commercial real estate to represent you effectively.
Imagine a landlord who receives a letter of intent from an agent representing a prospective tenant, and it is clear that the agent is not competent in the field of commercial real estate. The landlord knows that the agent isn’t experienced enough to know what to ask for on behalf of their client. Therefore, the landlord will have the upper hand through the negotiations, unfortunately, at the expense of the tenant who chose the wrong representation. Don’t let it happen to you!
Jenny Willardson is the owner broker of Elevate Commercial, based in Wasilla.