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The process of leasing commercial real estate is a tedious one but can be made easier with the right information. This article aims to help you understand how this works and what your options are when it comes to finding the best property for lease in an ever-changing market.
Real estate leasing is a big business, and it can be difficult to know where to start. This guide will give you the basics of what you need to know about leasing commercial space.
A commercial real estate lease is an arrangement between a company and a landlord that permits the firm to rent commercial property. Full-service leases, net leases, and Gross leases with modifications are the three types of commercial leases. Finding, negotiating, and signing a business lease is a lengthy process.
Knowledge of the required processes, which are detailed in this article, can assist company owners in making a better-educated selection.
1. Leasing vs. Purchasing Commercial Real Estate
To begin, you must determine whether to purchase or lease commercial real estate. There are times when investing in commercial real estate makes sense. The following are some of the advantages of purchasing rather than leasing commercial real estate:
- Building equity: This equity may be used as collateral for future expansions.
- Having an appreciating asset: Commercial real estate assets may appreciate in value over time, perhaps resulting in a profit if sold. Assets, on the other hand, might lose value, making it a risky investment to consider.
- Building depreciation: You may deduct the yearly depreciation on your tax returns.
- Cash flow: In most commercial locations, owner-occupied enterprises must occupy 51 percent of the area. You may, however, rent out the remaining area and earn money.
It’s not unusual for commercial properties to be sold, leaving lessees stranded. If you’re leasing a place that’s been sold to another landlord, it’s conceivable that you’ll be ejected from your contract. This will be stated in the termination clause. You’ll never get booted out if you own your own place.
Tenants who lease avoid paying a down payment on a business loan, which may vary from 10% to 25% of the property’s purchase price. Rather, they pay a refundable deposit equivalent to up to six months’ rent. Lease payments may also be deducted, lowering the tax burden.
Property owners, on the other hand, may only depreciate an asset throughout its useful life. If a commercial real estate property is financed, owners may additionally deduct interest payments and origination expenses.
Leasing is less stable than owning.
2. Define the parameters of your commercial real estate investment.
If you want to lease, the next step is to define your property criteria, since there is a large selection of commercial property accessible for all sorts of enterprises. These characteristics will assist you in narrowing down your search to commercial locations that meet your requirements. You should be aware of the following points in particular:
- Customer or employee pool of choice
- Zoning for commercial properties
- The size that you want
- Budget limit
- Accessibility
Let’s take a closer look at each of these:
Customer or employee pool of choice
If you’re a company wanting to attract physical visits to your site, knowing who your target client is the most crucial property characteristic. Restaurants, retail stores, and other such establishments are suitable examples. These firms should be aware of the locations of their ideal clients. A fast-casual restaurant may rent a commercial space in a location that caters to fast-casual diners. A Michelin Star restaurant, on the other hand, would wish to consider relocating to a more wealthy neighborhood.
If you’re searching for office space, make sure it’s at a location that’s handy for your staff. You may use a similar study to discover a location that is densely inhabited with or quickly accessible to your desired employment pool.
Zoning for commercial properties
Commercial real estate properties are designated according to their intended purpose. A warehouse, for example, is a commercial facility that is designated for industrial use. Leisure, office, retail, and restaurant zoning are examples of other commercial zoning. The kind of zoning determines what kind of company may operate out of a commercial structure. Make sure you’re familiar with the zoning rules in your area, as well as the sort of zoning your company requires.
To do this, you can check with your local chamber of commerce or Google either your ZIP code plus zoning regulations or your city plus zoning regulations.
The size that you want
The size and layout of the space you need determine the commercial leasing alternatives available. To get the required square footage, multiply the number of clients or the size of your personnel by the required square footage.
Restaurants and retail stores, for example, need an average of 15 square feet per person. Offices, on the other hand, generally need 100 to 150 square feet of useable area per employee. To determine the amount of commercial space required, multiply the desired number of customers or staff by the necessary square footage.
Budget limit
Your monthly budget is something else you’ll want to figure out. This can help you focus your search on places that are within your budget. Your budget is mostly determined by the size and performance of your company.
Begin by calculating the average price per square foot in your neighborhood. The yearly lease sum is usually divided by the total rentable square feet of the space to get the price per square foot. By entering your ZIP code into LoopNet’s list of commercial properties for lease, you may determine the average price in your region.
Multiply the average price per square foot by the number of square feet required for your company. This should give you an estimate of your business lease’s yearly budget. Divide that number by 12 to get your monthly lease payment.
After that, tally up your anticipated utilities and common area maintenance costs (CAM) and include them in your maximum budget estimates. Utilities are roughly $2 per square foot each year, and CAM costs will cost between 20% and 30% of your yearly lease payment, according to a decent rule of thumb.
You should also budget for any anticipated build-outs or yearly rent hikes. Kitchen equipment in a restaurant or fixed shelves and walls in a retail shop are examples of build-outs. The cost of a build-out is mostly determined by the sort of company, however, part of the expenses may be covered by the landlord. Expect a 3-percentage-point rise in your lease cost each year.
You should be able to handle the monthly lease payments and related fees if you keep your leasing budget within 10% of your estimated yearly gross income.
Accessibility
Accessibility is also an important consideration for retail establishments and eateries. Customers will expect these establishments to have plenty of parking. They’ll also want to choose a site with a lot of foot and car traffic, as well as be compatible with the Americans with Disabilities Act (ADA).
3. Get in touch with a commercial real estate broker
Brokers arrange the majority of commercial real estate leases. Listing agents and tenant brokers are the two categories of commercial real estate brokers often engaged.
A landlord hires a listing agent to market their business property. A commission of between 3% and 6% of the entire lease is normally paid by the landlord to listing agents. A listing agent is obligated to operate in the landlord’s best interests.
Tenant brokers are those who advocate the interests of tenants. Tenant brokers, on the other hand, are usually paid a portion of the total commission paid by the landlord, which is known as the tenant broker’s fee. While representing the tenant, the tenant broker is not necessarily obligated to work in the tenant’s best interests. The tenant broker may serve as a neutral third party, depending on the contract.
When Should You Hire a Tenant Broker?
A renter is not required to utilize a broker. Renter brokers, on the other hand, may generally assist a tenant with the following:
- Lists of real estate that is now offered
- Market price and comparables data that is accurate
- Understanding of the local market
- Negotiation
Because the landlord normally pays the tenant broker’s fee, this service is frequently free to the renter. As a reason, using a tenant broker to assist you in finding acceptable leasing sites is a fantastic option.
Where to Look for a Commercial Broker
The Broker List, for instance, contains a searchable database of broker profiles. You may look for someone by their name, business, or ZIP code. Alternatively, you might ask your professional network for a broker.
When looking for a commercial broker, consider the following questions:
- What expertise does the broker have with your unique business requirements?
- What is the scale of the real estate practice of the broker?
- What are the terms of the broker’s compensation?
- What is a broker’s fiduciary responsibility?
- Is the broker well-versed in the local market?
You’ll want to locate a broker with the ideal combination of expertise and attentiveness. You’ll almost certainly sign a formal contract after you’ve found a broker you can trust. Typically, this contract specifies whether the employment relationship is exclusive or nonexclusive.
Commercial Brokerage Exclusive Arrangement
An exclusive agreement is one in which the tenant works with just one broker for a period of up to one year. The renter is unable to deal with another broker during this period. A commission equivalent to a tiny fraction of the anticipated tenant broker charge is agreed between the tenant and broker and paid only if the landlord does not pay out any tenant broker fees.
NonCommercial Brokerage Exclusive Arrangement
There are two types of nonexclusive agreements:
- Right to represent: A right to represent nonexclusive agreement is identical to an exclusive agreement, with the exception that a tenant is permitted to communicate with other brokers. As with an exclusive arrangement, the renter still pays a commission.
- There will be no commissions agreed since this agreement is nonbinding. It authorizes the broker to speak on your behalf and book showings for you. While the structure offers flexibility, it also removes the tenant broker’s fiduciary responsibility.
How to Get Things Done Without a Broker
It’s important to remember that working with a tenant broker isn’t required. While a tenant broker might be beneficial, there’s always the possibility that you’ll have to pay a commission.
You may locate commercial real estate listings on websites like the Commercial Real Estate Listing Service or LoopNet if you want to hunt for them yourself.
If you do it alone, you’ll have to search fresh listings, schedule walkthroughs, and negotiate the lease without the assistance of a professional broker. The sole advantage of not utilizing a broker is that you won’t have to pay a commission. Otherwise, a tenant broker is generally the best option.
4. Recognize the Various Types of Commercial Leases
There are three main forms of business leases, with various prices and fees depending on the type of lease.
Full-service lease
The most frequent sort of commercial lease for office buildings is a full-service lease. The landlord is responsible for all property-related costs, such as property taxes and insurance, repairs and maintenance, utilities, and cleaning services. In this case, the landlord assumes responsibility for the property’s upkeep. There are no hidden fees, and companies can plan their monthly and yearly leasing payments ahead of time.
Net Lease
When opposed to a full-service lease, a net lease arrangement requires the landlord to charge a reduced yearly rent. Landlords, on the other hand, might add monthly “ordinary charges,” which include things like property taxes, insurance, and common area upkeep (CAMS). There are three types of net leases: single, double, and triple net leases.
- A tenant pays rent plus a pro-rata portion of the building’s property taxes under a single net lease.
- A tenant pays a share of the property insurance in addition to rent and property taxes under a double net lease.
- A tenant pays the pro-rata portion of property taxes, property insurance, and CAMS under a triple net lease. The most landlord-friendly leases are triple net leases, which are most frequent in restaurants and retail sites.
While the renter under a net lease pays a reduced base rent, the tenant is also liable for the monthly expenditures of property upkeep. These costs are usually added to the basic rent on a monthly basis.
Gross Lease with Modifications
A Gross Lease with Modifications is a compromise of the Full-service Lease and the net lease. A tenant might pay for their portion of their property taxes, property insurance, and CAMS, but they pay it as a lump sum payment along with their rent.
The rent on a Gross Lease with Modifications is therefore fixed, and there are no hidden costs or unexpected charges. If any of the taxes, insurance, or CAMS increases, the rent remains the same. Utilities and janitorial services are covered by the landlord with a Gross Lease with Modifications.
5. Locate the Appropriate Commercial Property
In addition to your property specifications, consider the following while evaluating alternative commercial property listings:
- Make sure the property is in close proximity to your target consumer or staff. You’ll want to look for a location with plenty of foot and car traffic, as well as enough parking for customers or workers.
- Facilities and services: You’ll want to know what the business space has to offer in terms of amenities. Communal rooms, free Wi-Fi, loading bays and docks, food choices, outdoor space, sewage and utilities, on-site security, and other facilities and services may be available. The sort of facilities and services you demand is often dictated by the zoning of your company.
- Landlord history: Because business leases are often multi-year arrangements, this is vital to know. The lease agreement, revisions to the lease agreement, rent hikes, and other terms will very certainly be dictated by the landlord you pick.
- Some multi-unit commercial developments feature an anchor tenant, such as Wal-Mart, Target, or other big chain stores. If the anchor tenant vacates, the landlord may be able to lawfully terminate the other leases on the property. Before you sign a lease, make sure you’re aware of any anchor tenants.
Conduct a number of walkthroughs
You and your broker should look at a variety of business locations. This provides you with a better idea of the typical pricing and offers you an advantage during the negotiation. You’ll want to compare rentals throughout your search to make sure you remain within your budget. Prior to signing a lease, it’s a good idea to look at at least four commercial buildings.
Your broker and, on occasion, the landlord’s broker perform walk-throughs. Bringing a professional contractor along to commercial buildings that need lease build-outs is also a smart idea. The landlord may fund all or part of the build-out costs. It’s critical to receive an exact remodeling estimate and negotiate a build-out into your lease in this situation.
Also, bear in mind that a resourceful broker could be able to come up with alternative choices, such as co-tenancy and lease term flexibility.
6. Negotiate the terms of a commercial lease
It’s time to pick one or more business premises and negotiate leases once you’ve studied your commercial property possibilities and their related leases. When you’re ready to start negotiating a business lease, you should start by asking the terms in writing. This request might come from you or your broker, and the landlord’s broker will provide the conditions.
You’ll next need to draft a business letter of intent (LOI) to reflect your offer or counter offer. The letter of intent allows you to persuade the landlord why you would be a good tenant, which is advantageous in a competitive commercial real estate market.
The following items should be included in your letter of intent:
- Make a statement about your intention to lease.
- Your company’s description
- Years of experience in the industry
- The following is a list of items and services, along with their prices.
- Your suggested words are interesting.
The conditions might be the same as the landlord’s broker’s proposal or a counteroffer from you or your broker. The rental fee and kind of lease are among the parameters, but there are other more complicated conditions. Any of these lease conditions may be challenged. The negotiation process starts if it’s a counteroffer.
Terms Used in Commercial Leases
Lease periods in commercial leases are often the same. While the payment arrangement may vary, all leases contain the needed deposit and the period of the lease.
Conclusion
A long-term rental arrangement between a commercial landlord and a company is known as a commercial real estate lease. Researching where you want to lease space, finding the proper broker to help you, and negotiating the finest conditions will all go a long way toward ensuring that you secure the best possible lease for your company.
Frequently Asked Questions
What is the process of leasing a commercial property?
A: The process of leasing a commercial property is a simple, yet lengthy one. You will first need to find the desired location for your business along with determining if you want to buy or rent. Once these two steps are completed, you can move on to applying for and completing all necessary paperwork in order to sign the lease agreement with your landlord. From there, it’s just a matter of putting down some money each month until your lease expires and moving out!
How do you make money leasing a commercial property?
A: Some properties are leased for a set amount of time, and other properties require the tenant to pay an up-front fee with the option of making monthly payments. The rent is then calculated based on various factors such as square footage, location, and more.
What should be included in a commercial lease agreement?
A: A commercial lease is a contract between the landlord and tenant that sets out the rights of each party. It typically includes information such as how long the tenancy will last, what rent will be paid, who has responsibility for utilities like electricity or water, and who owns any furniture in the property.
