Aviva is the Managing Broker of Sonenreich & Co, a third-generation commercial real estate broker, owner and investor in Denver, Colorado.
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Commercial leases are intimidating. What’s an NNN? How about a gross lease? Sometimes you’re dealing with a landlord-favored market, and other times the market is in favor of the tenant. While the landlord is always seeking the highest profits, the tenant is trying to reduce costs.
Both want to get what’s best for them into the lease. Below are the top ten tips you need to know for your next commercial lease.
1. Make sure the lease agreement has essential terms.
Verbal and written agreements are two different things, especially when you’re looking into commercial properties for lease. The property representative will tell you as many benefits as they can. Those verbal assurances must be a part of the written deal. Further, a lease should always contain the basic agreements like rent amount, rent due date and the period of the lease offered. The essential terms are key. The meat is in the fine print.
2. Condition your breakaway cost in the lease agreement.
See what stipulations your future landlord has on breaking your lease. You should never go into a lease with the plan to break it; however, things happen. Protect yourself with an out clause. You need to cover your back as ownership will certainly cover theirs. Sometimes the out clause can be stipulations on subletting; sometimes, it’s a set fee. Make sure you’re comfortable with the terms provided. Talk to your attorney about the best way you can negotiate a lease break clause that works for your business and lifestyle.
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3. Engage a commercial real estate broker.
Being a business owner means you know your strengths and weaknesses. It also means you know when to delegate tasks elsewhere. Finding and negotiating a lease is a task you should delegate to a trusted broker. Brokers spend their days learning and navigating the real estate market. Unless you do the same, I recommend having a broker handle your real estate. Trusted and good brokers can land their clients in more favorable properties with better terms.
4. Include additional provisions in your commercial lease.
An agreement should always be completed in its entirety. There should be nothing left for later negotiation, and all future situations must be covered in the lease. Since much of the success of your business relies on the lease, make sure you include further provisions like insurance requirements, hours of operation and a sublet clause. Beware of demolition clauses. These are provisions in commercial leases that require the tenant to pay for significant renovations such as the roof or the parking lot. Try to avoid these provisions at all costs.
5. Always negotiate for the removal of unfavorable terms.
Negotiating is about seeking common ground. Negotiate your lease terms with the general understanding of meeting in the middle. If your potential landlord is being unreasonable, walk away. Never believe that your landlord is entitled to additional benefits that they have inserted into your agreement if, in reality, those terms might jeopardize your business in some manner.
6. Learn from your future neighbors and avoid competition.
Imagine opening a gym with no radius clause, and the landlord lets your next-door neighbor also open a gym. This would be a huge issue. Or even worse: Consider a children’s daycare facility next to an adult toy store. The messy combinations are endless. Also, before signing on the dotted line, talk to your neighbors. Ask about crime in the neighborhood and what you can expect from the ownership. Your neighbors will often tell you everything you need to know.
7. Find out if there are any common maintenance fees.
Some areas charge common maintenance fees, which apply to everyone tenanting the property. Therefore it’s important to know about these hidden costs. The lease agreement should show how the common area maintenance fee is computed and who’s going to pay those costs once incurred. Suppose you sublease the property, and the common maintenance fee is divided. If the property has vacancies, landlords tend to add those extra common area maintenance costs to the tenants. I recommend that you negotiate this out of your lease as it only favors the landlord.
8. Calculate everything before you sign your lease.
Sometimes tenants wholly trust their brokers and the other party, and they sign the agreement without a careful read-through. A healthy dose of skepticism can help you here. Hence, you must calculate everything and make sure that every calculation reconciles with the mentioned terms and conditions. If you find any discrepancies, bring them up and negotiate.
9. Understand the different types of commercial leases.
There are different types of commercial leases. The landlord will generally choose the type of lease, but educate yourself first. A few different examples of lease types are triple net (NNN), full service (FS) or modified gross (MG). All have different ramifications to both you and your landlord. For example, an FS lease has the landlord pay all expenses, while an NNN lease, which is one of the most popular, has the tenant pay part of the property taxes, insurance and common area maintenance.
10. Don’t be afraid to walk.
You never know what your landlord wants or needs until it gets to negotiating the lease. There’s always more real estate. Don’t be afraid to walk away if you feel your landlord is being unreasonable or the terms don’t fit your needs.
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