Need To Lease Commercial Space?

Here’s How To Understand The Process

 

Finding the best space for your business can be a daunting task, especially if you’re not clear on the specific steps. Whether you’re a startup or an established business seeking expansion, a retail business or a professional practice, this post will help you understand the most common steps in the commercial leasing process, and how to successfully manage them.

 

Step 1: Understanding Your Requirements

Before diving into the leasing process, it’s crucial to have a clear understanding of your business’s space requirements, budget, and location preferences. Consider factors such as the size of the space, type of lease (e.g., gross, net, or modified gross), lease term, and any specific amenities or infrastructure requirements. This initial analysis will serve as your roadmap, ensuring that your search is focused and efficient.

 

Step 2: Market Research and Site Selection – Working With A Commercial Agent

With your requirements in hand, embark on thorough market research to identify potential properties. This stage often involves partnering with a commercial real estate agent who specializes in your desired market. A proficient agent can offer invaluable insights into local market trends, available properties, and negotiation strategies. And please note even if you don’t elect to work with an agent to help you find a space, most landlords have commercial agents to manage the leasing process. And so, a commercial agent, either the landlord’s leasing agent, or the agent you work with to help you find space, will probably be your primary point of contact during the process of finding space, and through the leasing process.

 

Step 3: The Letter of Intent (LOI)

Once you’ve pinpointed a suitable office space, the next step is to sign a Letter of Intent (LOI), which is usually prepared by the landlord, or the landlord’s agent. The LOI is a preliminary agreement between you and the landlord, outlining the key terms of the lease, such as rent amount, lease duration, and any tenant improvement allowances. Although not legally binding in most cases, the LOI serves as a formal way to express your intent to lease and sets the stage for lease negotiations.

 

Step 4: Due Diligence and Lease Negotiations

After the LOI is submitted and if the terms are agreeable to both parties, it’s time for due diligence. This phase involves a thorough examination of the property and its compliance with your business’s requirements. Concurrently, lease negotiations will commence, focusing on finalizing the terms outlined in the LOI. It’s recommended to have legal counsel during this process to ensure that your interests are adequately protected.

 

Step 5: Required Financials

Landlords typically request certain financial documents to assess your business’s financial health and viability. These may include recent financial statements, tax returns, bank statements, and sometimes, a business plan. For new businesses without a financial history, landlords may require a personal guarantee from the business owners, along with personal financial details, to demonstrate that you can pay the total lease amount.

Step 6: Understanding Lease Terms and Annual Increases, And Total Obligation

Lease terms can vary widely, but they often include provisions for annual rent increases, also known as escalations. These increases are usually tied to inflation indices (e.g., the Consumer Price Index) or set at a fixed percentage rate. In 2024, the current standard percentage increase is usually 3% annually. Understanding these terms and how they impact on your financial commitments over the lease term is critical. Let’s say you are leasing commercial space for $4,000/mo., and the lease term is 3 years. Your total obligation will be $144,000 ($4,000/mo. X 36 months – $144,000). And a personal guarantee means that you are guaranteeing that you will pay that lease amount, regardless of what happens with your business. So, it is very important to be completely clear on your total financial obligation, and your ability to pay it, for the full term of the lease that you sign.

Step 7: Understanding Price Per Square Foot

A “gross lease” is where you as the tenant pay a fixed amount, usually per month, most often calculated as an amount per square foot, per year. For instance, if you are looking at a 2000 sf space, and the rent per month is $4000, the amount per square foot is $24/sf ($4000 x 12 months = $48,000 / 2000 sf = $24 per sf).

 Step 8: Understanding NNN (“Triple Net”) Leases

A “net lease”, most often NNN or “triple net”, is a lease where the landlord breaks out the costs for taxes, insurance, and maintenance (aka CAM, or common area maintenance), separately from the base rent. This usually results in a lower base rent, with the NNN charges added on, usually expressed as an additional rate per square foot.

For instance, let’s say the same space from Step 7 was based on an NNN lease. The numbers might be: $3334/mo. Base rent, or $20 per square foot, but with $4/sf NNN, resulting in the same $24/sf total, just broken out differently than with a gross lease. Triple Net (NNN) leases often result in a lower total cost to you as the tenant because the landlord has calculated a fixed rate for each tenant, based on the size of the space they lease. It is worth noting that for this reason, the NNN portion of a lease is usually not negotiable. If you want to negotiate a lower total rate, it is usually best to attempt to negotiate a lower rate for the base rent.

Step 9: Understanding Tenant Improvement Allowances

Landlords will sometimes contribute to the costs for improving a commercial space, especially if it will increase the long-term value of the space. For smaller spaces, or where the interior modifications to a space will not result in increasing the value of the space, the landlord will often offer a month or two of free rent, in lieu of a direct financial contribution.

Step 9: Finalizing the Lease

With negotiations concluded and the lease terms firmly established, the final step is to execute the lease agreement. Before signing, ensure that you thoroughly review every aspect of the lease with your attorney to confirm that it aligns with your initial agreement and business needs.

Conclusion

Leasing commercial space is a complex process that demands careful planning, thorough research, and strategic negotiation. It is one of the most important business decisions you will make. By approaching this process carefully and with the support of experienced professionals, you can secure a lease agreement that supports your business’s needs. By following the steps above, you’ll be well on your way to establishing a presence in the right location that propels your business forward.

Have Questions? Please reach out to our team at 610-435-1800 or [email protected]