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Whether you are leasing commercial real Estate for the first time, considering expanding in your existing building or relocating to another, or opening a 2nd or 3rd commercial space there are a lot of things to consider. As a business owner or company representative you may be experienced in all kinds of business tasks and negotiations, however unless you do this day in and day out renting commercial real estate is a bit different. The smallest oversight or mistake can be costly. Below are a few commercial leasing tips to ensure you avoid costly mistakes, mitigate your risks, and negotiate the best possible deal.
- Start the Commercial Space Search Early. Avoid waiting until the last minute. There are good reasons why you want to start your commercial space search early. Space won’t always be available when you need it. It depends on your market, type of space, and size needed, however in general you want to start at least 6-12 months before you need space or before your existing lease expires. Leasing commercial real estate takes longer than you think and is not the same as renting an apartment. You want to have plenty of time to find the perfect space and negotiate the deal. If you get in a hurry you make mistakes and leave money on the negotiating table.
- Have a Plan – What are your goals and objectives for the space? Consider your company needs and goals and create a plan on how you will use the space. Make sure to separate your needs vs your wants and stick to a plan that is inline with your budget. Also determine what your headcount will be day 1 and the best you can determine how many you will have 1,2,3,4,5 years from now.
- Do Some Research – Have an idea of the type of space you need (office, warehouse, or retail) and what the average gross rental rates are in your desired area. A good commercial real estate broker can educate you on historical and current average lease rates, occupancy rates, and the time you will need to plan on for securing space. They can help you find space that you would not have known existed. They also have a pretty good idea what other companies are paying for spaces similar to the ones that you are considering. Find out as much as you can about the building owner, landlord, management services, and future neighboring tenants.
- Get Your Team Involved – Get everyone excited about the new space. Select a few of the leadership team to provide input on how they currently use and will use the space. They all have different perspectives that will be invaluable. What perks and amenities are the employees interested in? Maybe do a survey. In the end you don’t want too many chefs in the kitchen however you want to make sure you create the ideal working environment for as many as you can.
- Get Professional Help – Consider hiring a commercial real estate tenant representation broker. Not only can they help you with the research mentioned above they also can help you sift through thousands of SF to find the perfect space and negotiate the deal. Their fee does not cost you anything as they split a commission that is already being paid to the listing agent. They are legally required to represent your best interests. Also you want to have a good architect and attorney in your corner. From doing test fits to reviewing the lease they can help you maximize the use of space and minimize risks.
- Know the All-In Cost – There is more to negotiating commercial real estate leases than just the rental rate. It’s important that you know what your TOTAL monthly and yearly cost to rent commercial space is going to be. What are the estimated operating expenses? Who is responsible for the electric and janitorial service?
- Is your Use Permitted? – Just because there is a for lease sign does not mean it’s approved for your use. What is the space currently zoned for and what was the previous use? Will you be required to apply for a change of use with the city? Those are a few questions you need answers to when leasing retail space.
- Talk About Improvements to the Space – What improvements (if any) does the space need? For example does the space need new carpet and paint or do you need to have a few walls removed or built? Who is going to pay for the improvements and who will manage the construction? Will you be required to restore the space to its original condition when your lease expires?
- Discuss Subleasing – Make sure to negotiate the right to sublease your space. You never know when you need to downsize or expand which could happen sooner than later. Subleasing allows you to lease the space to another company. That way you don’t have to break the lease. It also gives you the flexibility of taking more space than you need now and sublease the extra space. This is important in a tight market where space is not readily available and you want to avoid having to relocate.
- Talk About Lease Term – Are you more comfortable with a long or short commercial lease? You can typically negotiate better lease terms and conditions with a longer lease (e.g. 3-5 years or more), however what if your company grows faster than anticipated and you have to relocate before the lease expires? If you plan on growing sooner than later you should consider a shorter lease OR if your favorite building will only do a longer lease then be sure to secure enough space to accommodate your current and future needs. A shorter lease term will allow more flexibility however keep in mind you may have to pay a premium to do a short term, especially in a hot market where there is not very much vacant space.
- Don’t Be Too Ambitious – It’s important that you rent space that will continue to meet your future needs however don’t be too ambitious. Be realistic when assessing your current and future needs. You don’t want to make the mistake of leasing too much commercial real estate that is underutilized or never gets used at all.
- Ask Lots of Questions – If you have a commercial real estate broker with you they will be sure you are educated and ask all the right questions. Before looking at commercial properties be sure to have a list of questions prepared so you don’t forget to ask the building owner or landlord representative.
- Get Everything in Writing – Whether a letter of intent (LOI), proposal, or request for proposal (RFP) get it all in writing. Some landlords have the ability to forget things that you ONLY verbally negotiate. Always work from a written proposal. You definitely want to verbally negotiate and discuss however to ensure that you are all on the same page get all the terms in writing. When you counter a landlord you want to be sure to redline your counter on the same document. Don’t make a mistake of only having verbal negotiations as you end up playing a game of he said she said later on.
- Commercial Lease Contracts are Negotiable – After you have negotiated the basic terms and conditions on the proposal the next step will be for the landlord to draft the lease contract. Don’t be alarmed when you see a 30 to 40 page document. Everything is negotiable. Just work with your broker and attorney to determine what is in your best interest. Be sure to consider your current and future situations and how things could potentially play out. The commercial lease contract is negotiable.
- If You Don’t Ask You Never Get – Always ask for more than what you want or need. If you don’t ask you will never know if it was possible to get.
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