Five Key Tips for Tenants Negotiating a Commercial Lease

Five Key Tips for Tenants Negotiating a Commercial Lease

Leasing a space may be just as time consuming, tedious, and stressful as buying commercial property but once the deal is done, the difference is that you will have a landlord to answer to. The following advice is based on my experiences as a commercial agent, some filled with triumph and success and others with pain and failure.

1. Your goal

You want a good landlord, and good landlords want good tenants, thus they will want to know about your business. A business, whether a startup or established, will need a legitimate business plan, show sufficient startup capital/financial information, and may need to sign a personal guarantee that will make you or a co‐signer personally responsible should the business and lease go into default.

For a longer term lease requiring tenant improvements, the landlord will have you fill out a financial application and also provide two to three years of profit and loss (PNL) statements. Don’t worry, bad credit or blemishes on the PNL aren’t necessarily the kiss of death. The landlord may ask that you pay a larger security deposit or pay for several months in advance to help offset any up‐front costs.

2. Location

Whether you need freeway frontage or will settle for an odd building in an industrial park, location will affect how successful you are as a business. Consider the following: parking, traffic counts, zoning, etc. You don’t want to set yourself up for failure by getting a space that ultimately hurts your business.

3. Lease rate

Your lease rate will always depend on business type and location. The lowest end on the pricing spectrum lies in industrial and flex spaces. Next is Class B&C office, local retail, then Class A office, medical, followed by anchored retail and restaurant space.

Full service: This is the very best case scenario for tenants. The landlord will pay for all utilities, operating costs, taxes, insurance and common area maintenance (CAMs). You will be responsible for smaller services such as your phone, liability insurance, and Internet.

Gross and modified gross: These along with Industrial Gross are the most common lease rates in our market. The landlord will pay property taxes, insurance, and CAMs. Trash and water/sewer will either be paid by landlord or tenant, and the tenant pays for electrical and gas. You’ll find this classification in Class B&C office, industrial/flex space, and Class C.

NNN: In a triple net lease the tenant pays for property taxes, insurance, utilities, CAMs, and just about everything else. Most NNN listings will come with an estimated NNN added to the lease rate. You’ll find this rate in most retail, Class A office, industrial, and medical buildings.

Percentage: This classification is rare in our market and only used in retail, particularly with restaurants. With a percentage lease, the landlord will receive a percentage of the tenant’s profit should the tenant’s sales exceed a certain number.

4. Lease negotiations and tenant improvements

One-year term: You pay full rent, no free move in time, and few changes can be made to the space. The landlord will make sure all HVAC, lighting, and plumbing is working, vacuum, and patch up walls.

Three-year term: You will usually get two weeks to a month to move in. Normally with every multiple year lease you will get an annual increase in rent. The industry standard is 3 percent.  The landlord may be open to letting you make tenant improvements.

Five-year and over term: With this the term tenant will ask for greater concessions in rent and landlord may contribute a certain amount to tenant improvements without amortizing into the lease. Usually there are more improvements necessary with a longer term, so the landlord will be more generous with free rent. To ensure you’re ready to go it is worded in the contract as “rent will commence no sooner than 60 days from lease execution and no later than 90 days, depending on date business opens doors.”

5. Other tips

Use a commercial agent: A competent agent will help you in finding the right site, negotiate the best terms, look out for pitfalls, and talk you out of a lease if it looks like

a bad idea. You as the tenant have to live with your decision, make sure you have someone who knows what they’re doing.

Use a legitimate lease document: I’ve seen some weird docs used, CAR has a lease document and we use AIR forms, both will protect you and the landlord.

Zoning: Always check to make sure your use is permitted even if it is zoned commercial. The last thing you want is to sign a lease, pay deposit, and find out when applying for a business that your use is not “allowable.”


Note: This article was written by NAI Benchmark and featured in the Central Valley Business Journal.  A link to the original article is below: