Once your business is established, finding a space to operate out of may be the logical next step. If you decide to lease a commercial property as opposed to buying one it’s important to be knowledgeable about commercial leases, know what to look for in a space, and the different terms of a lease. Your real estate agent or REALTOR® will guide you through the process and can give you up-to-date information on what is happening in the marketplace and the price, financing, terms, and condition of competing properties.
If you’re just beginning to establish your business or if you’re looking to expand, there are a few initial things you need to consider:
- How much space do you need?
- What will be the use of the property?
- Who is your ideal customer and where are they located?
- What is your financial position?
- What does the property need to be zoned for?
Once you have answered these five questions you will be able to begin the search for the right commercial property for you and your business.
Types of Commercial Leases
There are three major categories of commercial leases; gross, net, and modified gross. The difference between the leases is determined by how the building’s operating expenses are passed on to tenants.
- Gross or Full-service Lease – You pay a flat monthly rate which the landlord uses to pay all operating expenses including utilities, property taxes, and maintenance. This is the simplest and most convenient option. It’s important to be aware of expenses included, though. Are cleaning services provided? Is there a limit on electricity use? What’s the fee if you exceed that limit? All of these terms need to be included in the lease agreement.
- Net Lease – In a net lease, taxes, insurance, and building maintenance are shared between the landlord and the tenants in one of three ways. With a single net lease, you will pay monthly rent as well as the property taxes, while the landlord covers the rest of the expenses. With a double net lease, you will pay for insurance in addition to the taxes and rent. With a triple net lease, you will pay for taxes, insurance, and building maintenance costs in addition to the base rent. If you share the building with other tenants, the expenses you assume are pro-rated based on your share of the building’s square footage.
- Modified Gross Lease – This type of lease is a cross between a net lease and a gross lease. You will have a gross lease in addition to being responsible for some agreed-upon expenses, such as cleaning services, electricity, and heat. The landlord will pay for the rest.
Commercial Lease Terms
While the payment structure of your lease may differ compared to another commercial lease, both will include the same lease terms. It’s important you understand the following terms of your lease, so you don’t experience any surprises.
- Use Clause – A use clause determines what type of business can use the space. A restaurant may not be able to occupy the same space that a retail store can. Be mindful of the zoning of each property when you’re looking for space.
- Length of Lease – Commercial leases will typically range from 3-10 years. A short lease term allows you more flexibility and can reduce any possible future financial burdens.
- Assignability – If you ever want to sublease the property, it must be “assignable”. An assignable lease also makes it possible to include the lease in the sale of a business.
- Rent and Escalation – The lease should include the monthly and annual rent in addition to any future increases in rent. An escalation is a term that allows the landlord to legally increase the rent during the lease. A 3% increase in rent per year is common.
- Deposit – Your lease will likely require a deposit. The deposit protects the landlord from damages done to the property. A typical deposit is between 3- and 6-months’ rent.
- Lease Build-out Credits – These credits give you the ability to make any necessary improvements to the property in order for your business to operate successfully. The landlord will either offer a reduced rent, reimburse you, or pay out of pocket for the improvements.
- Termination Clause – This allows you or the landlord to terminate the lease early under certain conditions.
- Rent Abatement – If the property is damaged, you won’t have to pay rent (or pay a reduced rent) until the damage is fixed. Rent abatement reduces a business’s risk.
- Gross-up Factor – The gross-up factor is possibly the most overlooked item in a commercial lease. It is the difference between the square footage of the useable area and the listed rentable area. The difference is your proportionate share of common areas (hallways, bathrooms, etc.).
As an example, an office space that has 3,000 square feet of usable area is usually measured at around 3,500 square feet of space. While you can only use 3,000 square feet, you’ll be charged for the 3,500. This is the least understood term and the one that makes the largest difference in the lease.
Why You Should Use a Commercial Real Estate Broker
A commercial real estate broker understands the complexities of a commercial lease and will help you find the ideal space for your business. They can save you a lot of time by finding listings for you that fit your needs and specifications. Some business owners worry that a real estate broker will cost too much money. In reality, even with the cost of a commission factored in, most companies who work with a commercial broker end up saving money. A commercial real estate broker knows the ins and outs of the market, is skilled at negotiating, and is able to help spot troublesome costs or hidden fees in a potential lease that someone without experience might not catch. Lastly, not all commercial property listings are available to the public. A broker will have access to listings throughout the Capital Region that you may not, and one of them might just be exactly what you’re looking for.