5 Tips to Read Before Signing a Commercial Real Estate Lease

A commercial real estate lease can be scary and downright confusing. With this article we hope to provide you with five tips to help you navigate the commercial leasing arena. Please contact us if you have any more commercial leasing questions and feel free to check out some of the space we currently have available.

Working with a Landlord

Determine who is your Landlord.  The landlord is going to ask you for an application to help determine your ability and willingness to pay the rent as agreed and not destroy the property nor alienate other tenants or neighbors.  You should likewise determine that the landlord has a disposition to serve your needs with respect to the real estate.  Is the property well maintained and attractive?  Is the parking lot in good repair, does the roof leak, does the vacant space look clean and smell good?  Attention to detail is what you want.  A landlord that’s lazy when you’re dating will get more so after you’re married.

Commercial Real Estate Landlords

Will your landlord be able to go the distance?  In today’s environment it is incumbent upon the tenant to investigate the financial stamina of the landlord.  Most tenants never think about what happens if the landlord fails.  At a minimum the condition of the property and customer services decline.  In the extreme circumstance the landlord may default on the mortgage or even file bankruptcy.  In either case this can jeopardize the ability of the tenant to continue doing business at the property.  Determine that your landlord will be around for the long haul.

Tenant Improvement

Do you need improvements or special accommodation?  Some landlords are just not set up to accommodate improvements more extensive that paint and carpet.  Sometimes it’s a function of their capital base and other times it’s just a lack of ability or desire.  If you don’t need much then you can find landlords offering “as is” rental space and you can often negotiate hard for low rates and other favorable terms.  But if you are a tenant who needs a higher level of tenant finish or unique or impressive tenant space then look for landlords that demonstrate their capability and desire to have a higher-end product.  These landlords will often be vertically integrated with management, leasing, space planning, architecture, construction and many of the individual trades such as plumbing, electrical and HVAC in-house.    While the “face rate” of the rent may be more, the bundled services often yield a higher value than the sum of the parts.

Ironing Out the Details

Determine what are you renting.  Generally a commercial real estate lease rental rate is expressed as dollars per rentable square foot (RSF) per year.  Obviously you want to understand the rate which we’ll discuss in more detail below.  But the other operator is the RSF.  Buildings, like most other rental objects, have varying degrees of efficiency.  The RSF often includes more square than the usable square footage (USF) which more closely approximates what the lay person would measure for a given space.  But buildings have common lobbies, atriums, corridors, restrooms, amenities, and exterior walkway that are often included in a project’s RSF.  It is not unusual for the RSF for a space to exceed the USF by 10 to 20%.  The typical, sophisticated tenant understands this.  But if you know you need 1,000 usable square feet, be prepared to lease as many as 1,200 rentable square feet.  The commercial real estate industry typically defers to guidelines established by the Building Owners and Managers Association for determining the methods of measuring commercial properties.

Commercial Real Estate Lease Rate

What is the rental rate?  Nearly every property structures their rental rate somewhat differently.  Do not be intimidated by your rental agent or prospective landlords.  Be calm and patient and ask questions until you are perfectly comfortable with your understanding of the rental rate structure.  The basic components of any rent rate are the base rate, common area maintenance (CAM) fees, taxes, insurance, utilities and janitorial.  Many in the industry will use CAM as a generic phrase to refer to any combination of expenses being passed through to the tenant.  Sometimes the rent will be explained as “gross”, “modified gross”, “net” or “triple net”.  Unfortunately these phrases are used differently in different markets.  As real estate professionals move from one market to the next they use these phrases without aligning their meaning with the new market.  So, it’s always best to calmly ask what the rate includes and what expenses other than the rent will the tenant be obligated to pay.