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Before you rent space for your business, be sure you understand these basic facts about commercial leases.

Renting commercial space is a big responsibility -- the success or failure of your business may ride on certain terms of the lease. Before you approach a landlord, you should understand how commercial leases differ from the more common residential variety. And before you sign anything, make sure you understand and agree with the basic terms of the lease, such as the amount of rent, the length of the lease and the configuration of the physical space.

How Commercial Leases Differ From Residential Leases

It's crucial to understand from the get-go that, practically and legally speaking, commercial leases and residential leases are quite different. Here are the main distinctions between them:

Fewer consumer protection laws. Commercial leases are not subject to most consumer protection laws that govern residential leases -- for example, there are no caps on security deposits or rules protecting a tenant's privacy.
No standard forms. Many commercial leases are not based on a standard form or agreement; each commercial lease is customized to the landlord's needs. As a result, you need to carefully examine every commercial lease agreement offered to you.
Long-term and binding. You cannot easily break or change a commercial lease. It is a legally binding contract, and a good deal of money is usually at stake.
Negotiability and flexibility. Commercial leases are generally subject to much more negotiation between the business owners and the landlord, since businesses often need special features in their spaces, and landlords are often eager for tenants and willing to extend special offers.

Negotiating the Best Commercial Lease Terms

Negotiating a good lease can save you money. Learn where landlords are willing to make concessions. When you get serious about an available business space, chances are you'll be presented with a typed or printed commercial lease prepared by the landlord or the landlord's lawyer. As you read the lease, keep these points in mind:

Rule 1: Understand that the terms almost always favor the landlord.
Rule 2: Know that with a little effort you can almost always negotiate significant improvements to the terms.

In theory, all terms of a lease are negotiable. But your negotiating power depends on whether your local rental market is hot or cold. If plenty of commercial space is available, you can probably win many landlord concessions. If your area's rental market is tight or you are chasing a unique space, you'll have considerably less leverage.

Length of the Lease

One area of the lease you should always focus on is its length -- also called its "term." A short-term lease is almost always to your benefit. Shorter leases give you more flexibility if the needs of your business change -- for example, you want more space or decide that a different location would be better. There is a trade-off here, of course. A long-term lease ensures that you'll have an affordable business space for a predictable period of time. And landlords are often willing to make more concessions on longer-term leases.

If your business isn't particularly location-sensitive (a mail-order business or software testing lab, for example) and plenty of commercial space is available in your area, then a short-term lease makes sense. Even if the landlord doesn't renew your lease, finding comparable space won't be a problem.
On the other hand, if you have found an especially favorable location for a retail shop, restaurant or other business where location is key, deciding on the best lease term is more problematic. If your business does well, you'll want the right to stay on for an extended period. On the other hand, you'll probably be nervous about signing a four-year lease in case your business goes kaput.

A good solution is to bargain for a short initial lease with one or more options to renew -- perhaps a one- or two-year lease with an option to renew for two or three more years. Typically, an option to renew gives you the right to exercise your option to stay by notifying your landlord in writing a certain number of days or months before the initial lease period expires.

If you ask for an option, expect the landlord to want a higher rent for the renewal period. If the property is particularly desirable, the owner may also want an extra fee in exchange for giving you the option of staying or leaving after your initial term is up. This is a common arrangement, and if the space is important to the success of your business, seriously consider paying it.

Rent and Rent Increases

Another primary issue to consider when leasing space is how much rent you'll pay. It's sensible to check out rates for comparable spaces. If the rent seems unjustifiably high, try asking for a reduction. Many landlords, however, usually won't consider lowering the rent (except in poor economic times or areas), but you may be able to get a few months of reduced rent to compensate for moving costs.
Landlords will usually include an annual increase to your rent in your lease terms. If the landlord insists on keeping the clause, try to get a cap on the amount of each year's increase, and try to exclude a rent increase for the first year.

When you're shopping around, look carefully at whether the landlord will pay utilities, repairs, taxes and insurance. With a "gross lease," your rent includes these costs. By contrast, with a " net lease" you pay for them separately -- potentially a large sum. In fact, the best approach may be to offer to pay a higher amount for rent in exchange for eliminating these extras.

Tenant Improvements

If you'll need lots of improvements to the space, you may want to use the lion's share of your bargaining power to have the landlord provide them at no cost to you. If you're willing to sign a long-term lease, the landlord will be more willing to pay for improvements to the property.

Subleases and Assignments

Ask for the right to sublease or assign your space. That way, if you need to move out, you'll be able to have another tenant take your space and pay the rent, without having to break the lease. Or, if you rent enough space to grow into, you can sublease some of the space until you're ready to use it.

Commercial Lease Types

Gross Lease: A lease where the Landlord pays all of the operating expenses of the building (property taxes, insurance, common area maintenance, janitorial, etc.) for the duration of the term. In the Southern California market, this is the most popular type of lease for Class A office buildings.

Modified Gross Lease: Also referred to as an Industrial Gross Lease, the Modified Gross Lease requires that the Landlord pay for one or more of the operating expenses.

Example: Commercial Agent Dan markets his client's 1,500 square foot light manufacturing space at $0.75 per square foot modified gross where the tenant pays for his/her own trash services and electricity. The landlord will pay for all property taxes, insurance, common area maintenance and municipal water.

There is no standard for which expenses are the Landlord's responsibility. Landlord and Tenant can agree as to who pays for what.

Net Lease: In addition to rent, the Tenant pays for their pro rata share of operating expenses including property taxes, insurance and common area maintenance. In most cases, the Landlord is responsible for the roof, parking lot and possibly the foundation.

Triple Net Lease: Also known as a "NNN Absolute" lease, the Tenant is not only responsible for the operating expenses as in a Net Lease, he or she is obligated to pay for all repairs to the property. The Landlord simply collects rent which, unlike a Gross Lease, represents the Landlord's net operating income. Net leases are very popular with single tenant retail and industrial users.

Percentage Lease: Also known as an "Overage Lease", the Percentage Lease is additional rent due to the Landlord beyond just the base rent. The extra rent is based on sales over a specified amount, called the breakpoint. This type of lease used almost exclusively in a retail setting of large shopping centers and malls. It is beneficial to both Tenant and Landlord because the Landlord has a financial stake in the success of his or her tenants which encourages owners to maintain the property and wisely choose a complementary mix of tenants.

Indexed Lease: This lease ties the payments to a specified financial index such as the Consumer Price Index (CPI).

Step Lease: The Step Lease may increase the rent due by a preset amount or on a percentage basis. It may also address operating expenses such increases in operations, utilities and taxes.

Sublease: Subletting occurs when the Tenant transfers all of his or her right in the property to someone else. The original Tenant retains a financial obligation to pay the rent but becomes a Sub-Landlord to the Subtenant.

Example: Craig, a doctor in XYZ LLC's professional office building is leasing 5,000 square feet. After three years into a five year lease, Craig decides to downsize his practice to prepare for retirement. He really only needs 2,000 square feet. Craig is referred to a younger doctor by the name of Minh. Minh's practice has been growing by leaps and bounds and is ready to move to a better location. Craig's excess 3,000 is perfect. Craig hires Commercial Agent Dave to facilitate the agreement. A sublease agreement is written for a term not exceeding Craig's original term. In then end, XYZ LLC collects rent from Craig for 5,000 square feet. In turn, Craig collects rent from Minh for 3,000 square feet.

Disclaimer
The information provided in this website is deemed reliable, however it is not guaranteed. The accuracy of all information regardless of source, including but not limited to square footages and lot sizes, is deemed reliable but is not guaranteed and should be independently verified through personal inspection by and/or with the appropriate professionals.