Leasing commercial space can be a daunting task. The terms of the lease could impact your bottom line and in some cases determine the success or failure of your company. With vacancy rates in the office and retail markets declining, it is safe to say that most business owners will be faced with the decision of leasing space for their business sometime in the near future.
Many factors come into play when negotiating leases. What makes a great lease? The best lease is one that is completed, filed and never looked at again. This can happen if all points in the lease are agreed to, accepted and fully understood by all parties, especially the tenant.
The first and most important part of negotiating leases is to understand even the minutest details of the lease. This includes the allowances provided, responsibilities of the landlord and tenant, and any restrictions on usage of the space. Business owners should not assume anything when it comes to their lease. The tenant should get every commitment, promise and approval from the landlord or the landlord’s representative in writing as part of the body of the lease or as an amendment.
It is important to remember that before you sign anything, you should know exactly what you are getting and exactly what is expected of you as a tenant. Understanding the details of the lease can save the business owner time and money in the long run.
Equally important is the advance planning done by the business owner or tenant. Before you begin looking for space, you should think about the growth or reduction prospects of your company and what your needs will be over the next three to five years. Choose space based on that plan and have a strategy.
The elements of a lease should match your business plan as closely as possible. Just because a space is expensive does not mean that it should not be considered. You should do a comparative analysis on every space under consideration.
Since lease negotiation is not everyone’s forte, commercial real estate professionals can assist. Hiring the right person or team to represent your business can mean the difference between a good lease and a great one. It is the broker’s job to understand your business, find the best space for you and guide you through the lease process.
Communication between the landlord and tenant is also crucial. In the lease transaction and over the life of the lease, the tenant should be open and direct with the landlord about his or her plans for the space, as well as needs. The tenant needs to make sure the lease is a well-balanced document. One way to do this is to look for tenant-friendly landlords and to be a landlord-friendly tenant. It is a process of give and take.
Management of the lease is also a key factor in a successful transaction. Leasing commercial space is a complex business transaction and should not be delegated to someone who is not ready for that responsibility.
After it has been signed, the company should appoint someone to oversee the lease throughout its life. This person should know when all the eventualities of the lease come into play. Developing a thumbnail or an abstract can be helpful to keep current on all aspects of the lease.
One of the worst disasters you and your company could face is to be living daily under a poorly crafted lease or at odds with your landlord because you do not fully understand the lease. A good lease should be a win-win situation.
Commonly Used Leasing Terms
Common Area – The area used in common by the tenants of an office building. Common area includes building and elevator lobbies, restrooms and the corridor leading from an elevator lobby to a tenant space.
CAM Charges – Common Area Maintenance charges. Those charges levied on, or the expenses incurred in maintaining the common areas of a building.
Gross Lease – A lease in which the stated rent includes the operating expenses of the building. Same as Fully Serviced Lease. Opposite of Net Lease.
Load Factor – In a lease, the load factor is the multiplier to a tenant’s useable space that accounts for the tenant’s proportionate share of the common area (restrooms, elevator lobby, mechanical rooms, etc.).
Net Lease – (See also “Triple Net”). This indicates a lease in which the stated rent excludes the insurance, utilities, operating expenses and real estate taxes for the building. The tenant is responsible for the payment of these costs directly, or as additional rent. Opposite of Gross or Fully Serviced Lease.
Triple Net – A lease requiring the tenant to pay in addition to a fixed rental, the expenses of the property leases, such as taxes, insurance, maintenance, utilities, cleaning, etc. The terms “net net”, “net net net”, “triple net” and other such repetitions are used.
Useable Area – The secured area (square footage) occupied exclusively by the tenant within a tenant’s leased space. The useable area multiplied by the load factor for common area, results in rentable area on which rent is charged.