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Negotiating a Commercial Lease

How-to-Successfully-Negotiate-a-Commercial-LeaseIn a recent post I discussed finding the proper (i.e. “ideal”) retail location for your business. At that time I promised to follow up with the ins and outs of actually negotiating a retail lease. With some exceptions most of the components that make up this type of lease can be transposed to almost all other types of commercial leases but for now we’ll stick to retail.

 

Firstly, as I always state, “Use a realtor to represent you!” In almost all cases your realtor will get compensated by the landlord or its brokerage so his/her representation will be at no charge to you or your company (always check on this up front as not all landlords will cooperate with realtors or the listing brokerage may have the listing as an “Exclusive”, meaning the property is not on CLS and they will not likely cooperate with “selling” or “tenant” realtors on commissions). In this particular area you definitely want a knowledgeable professional on your side since negotiating a commercial lease can often be more complicated, intricate and time-consuming than a purchase.

 

Let’s assume the positive: you’ve found a suitable location, your realtor is being compensated by the landlord’s brokerage and you’re ready to make an offer. What exactly is entailed in this process? As I noted above it can get complicated. A commercial lease is a unique mélange of ingredients made up of 1) basic lease rate/sq. ft. (a negotiable figure) 2) additional or “triple net” (NNN) rent/sq. ft, (not a negotiable figure but must be verifiably justified by the landlord), 3) free-rent period(s) within the term of the lease, 4) fixturing period (the time period between the tenant’s actual possession of the space and lease commencement, usually awarded at no-charge) and 5) “TI” or “tenant-improvement” amount, a lump-sum figure that may be awarded (depending on the age, condition and usage change from previous to new tenant) by the landlord to the tenant so that the tenant may “improve” or prepare the space for business. This can be a non-repayable amount, a repayable amount added to the rent over the course of the lease or a combination of the two. So as you can see, it can be a very daunting task for someone not versed in either the above terms and/or commercial lease negotiation in general to take on something like this on their own.  Hire a professional..!

 

Despite lacking the space here to get into too much detail it is worthwhile expanding on a couple of the above terms.  “Triple net”  refers to the three main “net” costs that the tenant must pay on the landlord’s behalf – “taxes” (the tenant’s portion of the building’s property taxes), “insurance” (the tenant’s portion of building insurance) and “maintenance” (the tenant’s portion of the ongoing upkeep of the property). These triple net costs are calculated on the percentage that each tenant’s space comprises of the total building square footage. Free rent and TI are variable and negotiable items that are considered “incentives” from the landlord to the tenant to induce them to rent the space. The “norm” (if there is one) for free rent is approximately one month on a three-year term and two months on a five-year term. And depending on the motivations and negotiating ability of each side the free rent period can be “gross” (completely free of any rent payments) or “net” with only the basic rent not charged. The fixturing period is usually gross rent free to the tenant. Other things that must be considered by a prospective tenant are zoning (can they legitimately carry on their type of business in the area?), signage that complies with both landlord and city regulations, potential strata regulations, potential utility costs andenvironmental concerns, building tenant mix, rules on things like assembly usage (spaces that groups of people frequent like a school or yoga studio) etc.

 

Lastly, make certain that you hire a good commercial real estate lawyer to review your lease! Do not depend on your realtor for legal advice and don’t ask them for it. Realtors are not lawyers. To reiterate – hire the proper professionals all the way through this process. You will be glad you did.

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