Leasing a Commercial Space? Here’s What You Need to Know to Get Started
How to Start Leasing Commercial Property
No matter how tempting it might be, don’t fall into the trap of thinking a commercial lease is essentially the same as a residential one. While the latter may be more familiar to most folks, it serves as a poor analog for the former. A lease for commercial property tends to be far more complex than a residential lease. The length of term is typically much longer and the costs involved are significantly more. There is also much less standardization and many points that can be negotiated if you know how to approach them.
If you’re just starting to look into leasing commercial property, consider this a chance to re-learn the leasing process from the ground up. This article lays out the four core steps to renting space for businesses, and will help you understand some of the unique terms, general timing, and common pitfalls to watch out for.
How to Lease a Commercial Office Space or Warehouse Building in 4 Easy Steps
To start, let’s define the term commercial lease. A commercial lease is a formal, legal agreement where a tenant rents a building or other property from a landlord for the purposes of conducting business.
Commercial leases tend to be highly unique. They can be completely customized with a variety of provisions and incentives for both the tenant and the landlord. Often, the landlord will employ a representative like a Listing Broker to negotiate the terms most favorable to them. On the other side, tenants can use a Tenant Representation Broker (What’s a Tenant Rep Broker?) to advocate for their best interests.
However, despite the terms being highly variable, the general process for securing a commercial lease is quite similar from lease to lease. Below, this process is outlined in four core steps.
Step 1: Set your Goals
Before you start looking for a space, you need to know what you’re looking for. This is the time to lay out all the goals you have for your commercial space, including:
Budget
Budgeting for a commercial lease starts with understanding how much rent you can afford. Different property types will have different rates and structures.
However, rent is just the tip of the expense iceberg. If it’s the only thing you budget for, you’ll probably end up substantially underestimating your costs overall. Instead, it’s better to think in terms of the Total Cost of Occupancy that you can reasonably afford for a given space.
Location
Some businesses can operate effectively from just about anywhere, while others may need a particular city, neighborhood, or even street. Note that the narrower your location requirements are, the less flexibility you may have in meeting your other commercial lease goals.
Features
There are innumerable features a tenant might want in their final location. These depend on the type of use. Some of the most common ones we work with at Modern CRE include:
Dedicated and/or off-street parking.
Specific warehouse infrastructure (power, loading requirements, clear height, etc.)
Accessibility to highways, employee base, customers or nearby amenities.
Building amenities like fitness centers, conference rooms, cafeterias, etc.
Size
You want to ensure the space you rent has enough square footage to operate effectively. However, don’t just assume the square footage advertised in a listing is the actual square footage you get to control. Commercial properties tend to advertise rentable square footage (RSF) instead of usable square footage (USF), and those two numbers can differ by as much as 20% or more.
Depending on your operation, you may also need to consider dimensions like ceiling height or column spacing or requirements such as loading access(docks, drive-ins).
Lease Type
Finally, you’ll want to have at least a basic idea of how different types of commercial leases operate, and which type you’re interested in. The most common commercial lease types are:
Full-Service Lease/Gross Lease: The tenant pays only one number, the gross rent, while the landlord covers all other costs like utilities and taxes. The rent for this lease type may appear relatively high as it includes all costs in a single number.
Single Net Lease or Net Lease: The tenant pays base rent plus property taxes. The landlord pays the property insurance and common area expenses.
Double Net Lease (NN Lease): The same terms as a Single Net Lease, except that in addition to taxes and base rent a tenant also pays for the property insurance, while the landlord still covers the common area maintenance costs.
Triple Net Lease (NNN Lease): The tenant typically pays for all the property taxes, insurance, and common area maintenance costs in addition to their base rent.
Step 2: Look for Spaces for Rent
With all your wants and needs in hand, it’s time to start seeing what’s available for rent. While it’s possible to conduct a property search on your own, enlisting a Tenant Representation Broker is highly advisable. A broker will already have a strong understanding of the local market conditions. They can then use this knowledge to make your search more efficient, while potentially working with their contacts to secure more or better leasing opportunities. Meanwhile, you’ll get to focus on the enjoyable part – touring properties and focusing on the possibilities.
Step 3: Submitting a Request for Proposal/Negotiating Terms
Once you’ve settled on a location you like, the real work of negotiating a lease begins. The clearer you can outline your needs or requests to the Landlord/Listing broker, the more likely it is you will be well received and ensure important items are not missed. You will need to address a few things and most likely present financial information to be seen in the best light and secure the most favorable terms. A few items to consider:
Have financials ready to share, including Profit and Loss statements, Balance Sheets, & Bank Statements
Lease Term - What are you requesting
Tenant Improvements - What do you need done to space
Occupancy - When do you need to be in the space/work completed and ready to occupy
Rent - Defining rates and the structure of the lease
Concessions - Anything else required to incentive the deal
Options - Renewal, Expansion, Termination, Contraction, etc.
Expenses - What are they and who pays
… And many more items
A Tenant Representation Broker will help ensure you are not missing key items and help convey your requirements clearly. They will also help you discern how different space options compare on key items including rent.
4. Review Your Lease Agreement
Once all the documentation has been reviewed and the negotiations finalized, the final step is signing your lease agreement. Before you do, though, complete a final read-through with your Tenant Representation Broker and we always recommend a competent attorney review legal items.
If you or your broker have any questions during this read-through, no matter how minor, it’s critical to answer them fully before you sign your name. If you wait until afterward, the balance of power shifts substantially in the landlord’s favor. This can leave you stuck with something unfavorable for the entire term of your lease.
Completing a Success Lease of Commercial Real Estate
Hopefully, this article has made one thing abundantly clear – you too can lease a commercial space. While the process takes time and benefits greatly from professional expertise, it’s still easily attainable for most business owners.
To start exploring the process for yourself, reach out to Modern CRE today. Our firm has decades of experience partnering with business owners, helping them realize their real estate dreams. Simply get in touch with our team to start turning your vision into reality.