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What to Expect When Leasing Commercial Property for the First Time

Published: 08-03-23 Category: Leasing/Renting

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A commercial property in the middle of a city.

Leasing your first commercial property can be an exciting time for your business. But leasing a property of any kind is a big undertaking, and the details can become quickly overwhelming.

Getting the right commercial lease is a matter of patience, diplomacy, due diligence, and a dash of luck. With that in mind, let's cover some crucial bits of knowledge you should understand before leasing commercial property for the first time.

Let's get started.

What Should You Look For When Leasing Commercial Property?

Commercial property leasing has fewer restrictions and requirements than its residential counterpart, so lease agreements can become quite dense and complex.

Regardless of the lease, you should be on the lookout for the following sections, terms, and clauses.

#1 – Rent

What to Expect When Leasing Commercial Property for the First Time

Obviously, the central part of a lease agreement is its monthly rent. Commercial rent includes base rent plus additional money for utilities, insurance, and taxes.

Commercial landlords have to deal with fewer rent restrictions than residential landlords, so they can set and raise rates however they want. Average commercial rents in the US hover around $38 per square foot, but rents can differ depending on the state and city.

#2 – Security Deposits

Security deposits are additional payments separate from the rent that you pay to “secure” the lease. The purpose of a security deposit is so landlords can pay for any damages the tenant causes.

Think of a security deposit as a sort of insurance policy landlords use to protect their property. Landlords can sometimes waive security deposits as a lease concession, so consider negotiating a waiver in the lease agreement.

#3 – Permitted Uses

Every commercial lease should have a permitted use clause that defines how tenants can and can't use the space. Local regulations might restrict certain types of activities, such as manufacturing, to specific zones.

Permitting matters because it directly determines how and when your business can operate.

#4 – Renewal Options

Most landlords give tenants the option to renew a lease at the end of the designated term. Lease renewal is a good time to assess business priorities to see if your agreement is still meeting your needs. Be sure that your commercial lease includes a renewal clause that gives you the right to extend the lease if you so desire.

A renewal clause might stipulate a rental increase upon resigning—typically based on inflation or a specific percentage. The government does not regulate commercial rents, so landlords can raise rent as much as they want.

As such, lease renewal increases should be at the forefront of your mind when renegotiating your commercial lease.

#5 – Co-Tenancy Clauses

If you're signing a retail lease, ask about co-tenancy clauses. Co-tenancy clauses allow tenants to break leases or receive rent relief if total retail occupancy drops below a certain level.

The purpose of co-tenancy clauses in commercial property leasing is to provide relief to tenants who have lost traffic due to larger anchor tenants vacating the premises. For example, a smaller boutique might lose store traffic if the big box retailer next doot leaves the building, taking all their traffic with them. A co-tenancy clause could let them break their lease unless the landlord fills that space.

#6 – Tenant Improvement Allowances

Another lease clause to look for is tenant improvement allowances. A tenant improvement allowance (TIA) is a stipend that landlords give commercial tenants to outfit and modify the rental space to their needs.

Landlords typically calculate allowance amounts based on square footage and cover things like painting, updating flooring, installing lighting, and replacing windows.

#7 – Early Termination Clause

Your commercial lease should also include a clear early termination clause. An early termination clause outlines the exact circumstances you can break the lease before it expires without incurring a penalty.

Circumstances for allowing early termination could include the landlord failing to fulfill their responsibilities or your company going bankrupt.

What Questions Should You Ask When Leasing Commercial Property?

When shopping around for a commercial lease, it's always useful to have a handy list of questions to ask landlords and agents.

What is the minimum required lease length?
How many other tenants will be in the space?
Does monthly rent include utilities or not?
What kind of parking do you offer for employees, customers, and guests?
What is traffic like around the building?
Do you plan on subleasing any space in the near future?
Do you offer a tenant improvement allowance for updates?
What company or organization handles repairs and maintenance on the building?

Commercial property leasing is complex, so you can never be too thorough with the questions you ask. That's why we recommend working with a commercial real estate agent who can help you ask the right questions and go over your commercial lease agreement with you.

What Is the Most Common Commercial Lease?

The most common types of commercial leases are net leases. There are three main types of net leases that differ in what responsibilities the landlord and tenant have:

With a single-net lease, the tenant pays rent and property taxes, and the landlord pays for insurance, maintenance, and utilities.
A double-net lease requires the tenant to pay for rent, property taxes, and insurance, while the landlord pays for maintenance.
In a triple-net lease (NNN), tenants pay rent and all building expenses, excluding basic structural repairs.

Of these three, NNN leases are probably the most common because they pose the least risk to landlords. Opposite of net leases are gross leases, where the tenant pays a flat monthly fee that covers taxes, insurance, and maintenance.

What Is the Simplest Type of Commercial Lease?

Gross leases are the simplest type of commercial property lease for tenants because the landlords charge a singular, flat fee that covers mostly everything.

This lump-sum payment structure makes payments more predictable and easier to budget for. The downside of this simplicity is that gross leases tend to be more expensive than net leases.

What Is the Shortest Commercial Lease?

The most common lengths for commercial leases are three, five, and ten years. In rare cases, landlords may offer year-to-year and other short-term lease terms. Most landlords will require at least a three-year lease so they can recoup their investment.

Short-term commercial loans are generally non-ideal: You can often get a better deal on space if you shoot for a longer lease, and landlords prefer long-term tenants rather than those looking to stay temporarily. You may also be able to negotiate additional concessions if you sign a longer lease term.