Commercial Real Estate Leases - The Basics

Wouldn't it be nice if commercial leases were exactly like renting a house? Unfortunately, there are a whole set of different things that go into leasing a space for your business venture.

For instance, more often than not, the quote comes in the form of by the month or year and how much square feet are involved. And in that scenario, the road is forked. The space you really use for your office is known as usable square footage. Then there's the square footage you are charged for. They aren't the same.

Why? It all boils down to your portion of the common space in the building. That's why it's paramount to pull out the tape measure to determine how big (or small) of an area you'll need.

Roll Call: A Breakdown of Commercial Real Estate Lease Types

This portion should give you an idea of what you're looking at when you're researching a commercial lease for your business:

• How long is the lease for?  We'd recommend going short but allows you multiple options when the lease runs its term. Not to be negative, but you don't want to be saddled with paying for an empty space in case the business goes belly-up. You also want to have the option, if everything works out, to expand. Leave yourself a lot of wiggle room. The landlord wins when you sign-up for a long stint. On the other hand, the more you stay, the better chance you'll have at the negotiating table. If you are sure you'll be around for the next decade, it's not unusual for some businesses to take-out a 5-to-10 year lease.
• The Percentage Lease. For those not into manufacturing, concentrating more on retail space, this option is quite the norm. J
• A Gross Lease. Very simple concept. It basically means that the price and fees are included in the quote you receive on the per square footage agreement.
• The Net Lease.  This type of commercial lease comes in pieces. So, you're not only paying for square footage, you also pitch-in for a portion or all of the other expenses which are associated with running the property. Another term you may encounter is the "double net lease." Translated, it means you're responsible for insurance and taxes. The one called "triple net lease" includes the same as above but tacks on maintenance. The landlord may refer to the triple as Common Area Maintenance (CAM) fees. A word to the wise -- this one could result in a major headache for you. Just make sure you have a total understanding of all CAM fees. Further, iron-out the limits or caps so that you're not slammed with year-end increases.

Side Note:  If your thinking about changing locations or adding a new location, you will probably be in the market for a phone system. Choosing a business voip solution can save lots of money.

The Lease Revealed

Hate to say it, but it's like going to a casino. The house always wins, right? What we're getting at is that the first copy of the lease is meant to stroke the landlord. The person leasing the property likes to think you are simply going to sign on the dotted line.

Big mistake. Commercial leases are far from standardized. That leaves you a wide berth during the negotiation process. Take a look at the hand you can deal-back to the house:

• Rent increases. You want stability. Alan Katz at Mintz & Gold LLP explains the sneaky-side that some landlords try to pull in this article.
• Exit Strategy. If it's time to move-on, what happens if you have to break the lease? Negotiate to try to keep the penalties down to a minimum. A couple months consequence is acceptable.
• You're All Alone in a Dying Mall. Called the "Co-Tenancy Clause," this protects you if the foot traffic tiptoes-off because an anchor store-or-two leave. It allows you to break your lease early if such an event were to happen.
• The Exclusive Use Clause. Got a competitor? What's to the prevent the landlord from renting commercial space to someone who is going to steal your business. This clause puts a damper on that practice. Think protection.
• Give Me a Sign. What kind of rigmarole are you going to have to experience if you want to pitch a sign? Get it clearly defined by the landlord as it relates to "what is and what is not permitted." Great article on storefront signs.
• What's the Security Deposit? Here's another negotiation opportunity.
• Who pays for what? Remember we asked at the top, "Wouldn't it be nice if commercial leases were exactly like renting a house?" As you can see, it's not. Matters like fixing the HVAC, other appliances and maintaining the property may end-up in your wheelhouse.

We leave you with this thought: Never assume anything when securing a commercial lease. Sure, we hear this phrase a lot "location, location, location." We merely would add, "negotiate, negotiate, negotiate."