Basics of Commercial Leasing
Being a first-time tenant in a commercial lease is something that you need to be prepared for. After choosing a general location one of the most important decisions you will need to make is your budget and how long of a lease you will commit to. Be prepared as it’s not like shopping at the grocery store, EVERYTHING IS NEGOTIABLE in the leasing world. In general, leasing prices and terms are set by several factors including supply & demand, market conditions, and the three L’s (Location, Location, Location). For example, a building may have a waiting list of tenants who are ready to move in if a space becomes vacant. In this case, the lease rate might be very high and require a five-year agreement. On the other hand, if a building is mostly vacant you might be able to negotiate a lower price with only a one-year agreement. In other words, there are a lot of factors that come into play when leasing.
There are two basic kinds of commercial leases:
Gross and Net leases. Gross leases, sometimes known as full-service leases, are structured where the landlord pays for certain services and the tenant pays a basic monthly fee to rent space. For example, if you rent an office in an older building your space may not have its own electric meter or water meter. In this situation, your landlord is paying your electric or water bill. In this example, your landlord will negotiate a cap on your power or water usage and put that into the lease. This usually doesn’t stop at basic utilities. It could also include parking spaces, internet, conference room use, building maintenance, and literally hundreds more. In general, gross leases can be more tenant-friendly and would most likely be offered in older buildings where utilities may not be subdivided, in buildings that require a lot of maintenance, or in markets where they are custom and are accepted.
Net leases are the exact opposite of gross leases, where the tenant is responsible for everything or almost everything. In most markets, the highest form of net leases are called Net Net Net, or triple net leases. Common spaces for triple nets are retail and newer office buildings where each unit has its own utility meter. In addition, single-tenant buildings, old or new, are good candidates for triple net leases. Even in triple nets, the landlord will most likely be responsible for some part of the building maintenance. A good example might be a roof leak, water main break, etc. Net leases typically favor the landlord because their return is more fixed due to less responsibility and the tenant must plan for more variables including repairs and utilities. Even in net and triple net leases, everything is negotiable.
There are other important basics for first time leasing deals. Pricing, for either type of lease, is almost always quoted in price per square foot. This price either represents the price per month or the price per year. In many cases, a price increase is negotiated into the lease.
Another important factor is the term of the lease. You need to know how long you plan on staying in the space. Most leases are three to five years. Typically, the shorter the term the higher the asking price and vice versa. Last is the personal guarantee. This guarantees to the landlord they will get their money. In most cases the better the financials or name brand of the tenant, the more likely they will be to get the space over someone who is just starting out for the first time.
Now that you know some of the basics of leasing 101 you should be better prepared when heading out to negotiate your first lease. If you need any further assistance, please be sure to contact me at 208-489-6172. I’m happy to help.