What You Need to Know About Commercial Real Estate Leases

Take the stress and complexity out of your commercial real estate lease by learning what every CEO and business owner should know.  

Commercial real estate leases are as complex as the businesses that sign them. Every business is unique in different ways: type, how it operates, culture, and growth and revenue goals. Additionally, leasing is getting more complex as many companies, including tech companies, require special and complex communication and security hardware and systems. CEOs and business owners have a lot to consider before signing a lease, since it is one of the biggest and longest commitments made in business. It can be overwhelming to even the most experienced business owner.  

As commercial real estate advisors, we advise our client to look at overall business goals and objectives before considering negotiations, types of leases, and costs. Align your leased space with your goals to help improve productivity and performance, attract workforce, manage cash flow, integrate space to business culture, and increase tax benefits.  

In this blog, we have compiled some of the most common questions or concerns business owners have on commercial real estate leases and some tips to consider.   

WHAT YOU NEED TO KNOW 

Negotiations  

Many business owners don’t know just how complex commercial real estate lease negotiations can be. Negotiations are different in almost every situation because varying factors can affect the outcome, such as landlord preferences, current building/space condition, current market, and the tenant’s financial situation. Additionally, different negotiation strategies are often needed based on whether you need retail, restaurant, or office space. Also, don’t underestimate time needed in renegotiations of your current space. Renegotiations can be just as complex as the original negotiations. 

Lease types 

The type of leases available for negotiation can make your head spin. There are full-service or gross leases, modified gross leases, triple net leases, double net, single net, absolute leases, and percentage leases, just to name a few. Also, entering into a lease type that doesn’t work for your overall business plans will impact your bottom line as well as operations and growth strategies.  

Total cost of occupancy 

There are direct costs associated with a lease such as term, lease rate, buildout allowance, price per SF, and utilities. However, looking at the total cost of occupancy is far more valuable when assessing costs. Total cost of occupancy includes direct costs but also considers other operating expenses including furniture, hardware needed for connectivity, employee commuting time and gas, common area maintenance (CAM) costs, and landlord pass-through expenses.  

TIPS 

We routinely give our clients guidance on how commercial real estate leases can affect overall business goals. Listed here are some helpful tips for you to consider.  

Start the process early:  

Start early to put yourself in the best position for negotiations. Negotiations and, yes, even renegotiations, of leases take more time than you realize or anticipate. Put business objectives into a business plan to help align your lease with goals. Getting a head start on securing your financing will help reduce stress in negotiations too. Ensure proper occupancy permits are in place so there is no delay with your planned move date. However, even if you are behind, consider contacting a tenant advisor. There may be areas an advisor can help. 

Evaluate Metrics: 

Make sure your business goals and strategies are aligned with your commercial real estate lease by looking at metrics. Evaluate commercial real estate metrics such as business growth versus price per square foot and business objectives versus costs.  

Two types of leases:  

Know these two basic lease types to help you understand the structure of more complex lease structures.  

• Full-service or gross lease – Property costs such as utilities, taxes, and maintenance are paid by the landlord. This type of lease is generally used in multi-floor, multi-tenant office buildings, because all the tenants use the building’s utilities in the same way. 

• Net leases – There are three types of net leases – single, double, and triple. The difference between each is the amount of “nets” that are excluded with the base rent. Single includes taxes, insurance, and CAM, but excludes utilities. Double includes taxes and insurance but excludes CAM and utilities. Triple is the most common and excludes all three nets. Triple net is most common because it allows the tenant more flexibility in customizing space.  

Negotiating:  

Negotiations are often difficult since there are many factors including the tenant’s financial situation and use, current market, and existing building/space conditions. Here are some quick tips to consider before beginning the negotiation process. 

• Ensure the lease supports your overall business goals and strategies 
• Clearly understand what you want your lease/space to accomplish  
• Understand the landlord’s preferences
• Negotiate through a give-and-take process  
• Make a list of items you absolutely need and items that you can live without to be sure the absolutely need items are negotiated in your lease

Most first-time business owners are surprised to learn that commercial real estate is often less standardized than they expected. When everything is taken into consideration, there is no standard commercial lease, no standard forms, and more negotiations are needed than most business owners realize. Use a trusted commercial real estate advisor to minimize the stress by allowing you to focus on the business with little distraction. Consult a tenant advisor that will help guide you and simplify the process for you. 

Let Verity Commercial review your current lease or business plan to provide recommendations on pursuing your next commercial real estate lease.