Commercial Leasing - 101
When it comes to leasing commercial there are a number of important issues to consider. But, if you are thinking about starting a business, then you should understand the process. Being prepared before you enter into any negotiations with an experience landlord and their agents is extremely important. Using a professional agent is a must. Even with all the information you gather you are still emotionally invested, where your real estate agent or broker has the advantage of taking emotional out of the equation.
What to Expect
Before you even begin, I would suggest making sure you have your financial information in order. You have to have credibility with the landlord to even lease a space. I know of several tenants that were turned down for a lease when their financial information was not strong enough. The landlord and his agent have to believe you have the financial ability to get you business underway. The landlord, or his agent, will ask you to fill out a form with financial and background information on you and anyone else that will be on a lease. Also, it is very important to many landlords that you have experience in the business you are trying to open in their building. However, if you financial position is strong enough, and you present it with a strong business plan then the landlord with open the negotiations for your leasing space.
Letter of Intent
Before you even get the negotiation your agent will draft a letter of intent (LOI). This is not a lease, or legally binding contract. It is more of an request to be considered for as a new tenant for the space. Don't get me wrong, you are not coming hat in hand, begging to get let in. The LOI is a detailed letter stating what you expect your lease. Since it is written by your agent, it is heavily in your favor. Some of the more important details it will contain is how much you would like the rent to be, NOT what he is asking for. Along with the requested rental rate per square foot, often agents ask for rent concession. Like the first 60 days (after deposit) free rent. There are many details and items to be negotiated in order to obtain a good lease for a tenant.
After the Letter of Intent
After you have submitted the Letter of Intent along with your financial qualifications to lease the space, then the landlord, or his agent, will determine if you are qualified to lease their space. In the present econmony many might ask, aren't they lucky to get anyone? Not really, they have costs for letting you in their space. They have to pay the landlord's agent and the tenant's agent. If you signed a five year lease for 5000 sq. ft. at $2/sq. ft. they might have to pay $36,000 dollars upfront. Then what if you fail to even get open for business. Don't laugh, I have seen it happen. So if you passed muster and the landlord is willing to take a chance on you, now you enter into negotiation.
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Lease Negotiations
Here is were you need a buffer. I have seen people become very anger during the negotiation process. If you have your agent handling this for you, then the good ones will unemotionally debate the landlord to win all the points you want in your lease. There are enough point to negotiating lease to fill a book, and many have been writing on the subject. So I will just include a few of the major ones.
- Ask for options. A five year lease with three five year options.
- Negotiate your rent increases based.
- Obtain the right to assign or sub-lease your space and obtain a clause whe re landlord cannot unreasonably withhold an assignment.
- Negotiate the usage restrictions. You might want to expand you services and product lines, but if you signed a less to only sell pots, then that is all you can sell.
- Alwasy understand the default provision of the lease. You should face the possibility of failure. Then what will be your exit strategy.
- Be sure you understand how many days notice you need to give before excersizing your option. Some Landlords require up to 180 days notice.
- Review the by-laws and talk to other tenants.
- Professional assistance is paramount when negotiating a lease with a Shopping Center or any other location that requires the payment of Common Area Maintenance.
- Other important Things to understand.
Triple Net Leases
Triple net lease are often written as NNN. Many leases are "NNN" where the tenant agrees to share building insurance costs, taxes and common area maintenance (CAM) chargres along with the other tenants in the center based on square footage of their space. Taxes and insurance costs are easily calculated. However, CAM can get way out of control. At a mall the landlord can decided to go all out on holiday decorations. Then add all the cost intothe cam charges. It's easy to understand that CAM charges need to be carefully examined. Negotiate the specifics up front and incorporate into the lease document both CAM inclusions and exclusions. Then cap the CAM at a reasonable square footage rate to avoid future escalations. Additionallly you should know that you have the right to audit the CAM charges.
There are many more issues and pitfall in a lease. I would strongly advise seeking the help of a professional before you enter into one. |
