For Beginners: Winning Tactics for Your First Commercial Lease

Published: 06-26-24    Category: Leasing/Renting

Specializes in providing actionable insights into the commercial real estate space for investors, brokers, lessors, and lessees. He covers quarterly market data reports, investment strategies, how-to guides, and top-down perspectives on market movements.

Two professionals negotiating a commercial lease.

Leasing commercial space may seem like a challenge, especially if you're in the middle of launching a new business or haven't any prior experience.

However, you can prepare for this task well ahead of time, and this article will help you prepare. You'll learn how to review commercial lease contracts confidently without worries about confusing terms.

In addition, you'll learn how to compare other landlords' lease options. This is equally important as it prepares you to negotiate the best possible terms at a crucial time.

First, we'll review the basic clauses within a standard commercial lease agreement.

Common Lease Terms and Clauses

While the initial pages of a commercial lease resemble a residential lease, defining the tenant and landlord (Parties) and the space you plan to occupy (Premises), the remainder takes a different direction.

A standard commercial lease may contain most or all of these clauses:

  • Use Clause: This defines how you will use your space.
  • Term Clause: This defines the length of your lease, together with starting and ending dates.
  • Exclusive Clause: This is a promise from the landlord that other spaces in the property, building, or mall will not be rented to a business that competes with you or will possibly reduce your customer base.
  • Rent: Study this carefully to see whether this matches your rent estimate.
  • Security Deposit/Letter of Credit: This assures your landlord that rent will always be paid.

The first part of preparing to negotiate a lease is deciding what it must contain.

Define Realistic Goals

You can keep this simple by making two sets of notes: what you must have and what you would like to have.

Here is a sample of some realistic goals:

  • A rent price that's equal to or below market prices;
  • An improvement and/or build-out allowance;
  • The right to sublease any unused/vacant space; and
  • Affordable renewal options.

This is also the right time to decide on some negotiable items. For example, you may agree to a longer lease term if the landlord provides a longer initial free rent period. This will help you establish your business while reducing a landlord's vacancy rates.

Now, it's time to see what other landlords are charging for similar space in your area.

Locating Suitable Comps

By researching rent pricing for similar commercial properties, you'll know the “going price” for your space. This helps prevent you from paying too much.

CRE comps come in two flavors: sales and lease comps. This means you need to avoid buildings that are not being actively leased.

When you're looking for commercial buildings to compare to your planned new business home, try to find properties with as many similarities as possible. This should include location, class, and amenities.

In addition to rental rates for these properties, make a note of:

  • Average rental pricing per square foot (psf);
  • Similar sizes of buildings;
  • Similar age, class (A, B, C), and condition;
  • Current deals and concessions offered by various landlords; and
  • Current vacancy rates.

Be ready to use these notes to compare a landlord's initial offer against the going market rates. However, don't forget a landlord's position and priorities.

Kinder, Gentler Negotiating

Here are some common landlord worries to keep in mind, as they'll help you negotiate fair compromises. (It never hurts to be friends with your landlord, either.)

  • Rising numbers of vacancies;
  • Future numbers of expiring leases; and
  • Problems with cash flow and maintenance costs.

A landlord with a rising number of departing tenants will probably be more motivated to negotiate terms, as new tenants will solve these problems.

Next, you'll want to define your terms and look at the big picture before you nit-pick minor details.

Negotiating the Basics

Before you consent to the preparation of a lease, you'll want to discuss

  • The lease's length, including renewal options;
  • Security deposits/letters of credit;
  • Your improvement allowances and/or buildout costs; and
  • The amenities and building services that are part of the rent.

Next, it's time to compose a letter of intent (LOI). This will include the basics of the lease listed above and any other negotiations that have yet to be agreed upon.

Composing a Professional LOI

Your LOI is a negotiation tool that will ideally create the foundation of your lease contract. It proves you're serious about renting and puts your preferred terms in writing, helping the landlord visualize your requirements.

Think of the LOI as a discussion document that will help you obtain the terms your business needs to succeed.

In addition to your terms, you'll need to compose a written profile of your company. This will help the landlord understand your needs and trust you as a professional business owner/manager.

Your LOI should also include:

  • An opening paragraph that includes the property's address, stating you are interested in leasing it under specific terms. List these terms in the next paragraph. Be sure to describe them as non-binding. Otherwise, the landlord will assume nothing is negotiable.
  • Next, describe your staff and if you'll be installing equipment or machinery. This helps ensure the space will accommodate them.
  • Describe your current space and business hours. This also helps determine if your future space will be suitable, as your landlord will see these and warn you if needed.

Close your letter with detailed contact information so you can be easily reached. If you're working with a broker, be sure to include their contact details as well. Be sure to share the LOI with a broker before sending it to the landlord.

When the landlord responds to your LOI, it's time to get serious.

Communicate Thoughtfully-Negotiate Firmly

Before meeting with the landlord, remember it's a two-way street.

  • Ask questions that give opportunities for landlords to describe their constraints.
  • Be confident but don't be aggressive.
  • Be sure to note the terms that both of you agree upon.

Displaying empathy with a landlord's challenges sets a positive tone, which can be the first step in a mutually beneficial relationship.

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