Leasing commercial real estate for your business requires an understanding of the various steps to properly facilitate the process. You’ll have to consider the different types of leases, property conditions, and characteristics, and how to go about negotiating lease terms. In this guide, we will walk you through the process step-by-step on how to lease commercial real estate.
Step 1: Verify if a Lease Is Your Best Option
Leasing a commercial property vs purchasing a commercial property can have varying advantages and disadvantages. Before you get too far into leasing a commercial property, consider the alternative of buying the property instead. Leasing commercial property is typically done as a short-term rental agreement wherein you gain no ownership interest. Once the lease ends, you may need to vacate the property or renew the lease.
On the other hand, purchasing a property allows you to build equity and retain the right to occupy the building. For a more detailed comparison and to help you make the right decision, you can read our guide on buying vs leasing commercial real estate.
Step 2: Identify the Property Characteristics You Need
When shopping around for a commercial property, you’ll need to consider your business needs and goals to determine what type of property is best for you. You should take into consideration the features and characteristics necessary for a building that suits your industry and operational uses. Common characteristics to keep in mind include property location, size, and cost.
Property location can have a significant impact on the success of your business. It can influence your ability to obtain foot traffic from customers and attract an employee talent pool. It can also have implications for the type of activities your business can conduct based on local zoning regulations.
- Location to complementary businesses: Being in close proximity to businesses that offer products or services that complement that of your own can bring in additional customers. In fact, working with complementary businesses in the area is one of our retail promotion tips to attract more customers.
- Employee talent pool: Consider the number and types of workers that typically reside in the area. Unless you hire remote employees, consider the driving distance and expected commute times, as this may affect the pool of workers who would be interested in coming to work for your company.
- Type of customers: One question you can ask yourself when considering your customers is whether they are likely to visit your area. For instance, a high-end restaurant may be better off in a more affluent area. If you need more guidance in this area, see our article on how to determine foot traffic, which also covers how to do a foot traffic analysis.
- Property zoning: Local zoning laws can dictate what type of businesses may operate in an area, and consequently, the types of business activities that are permitted. You should check your local chamber of commerce to see if there are any restrictions that may affect your business.
Property size plays a large role in the operations of your business. When leasing real estate, you’ll need to find a property that’s structured to your specific business needs. Size, layout, and accommodations can be integral to the workings of your business, whether it be for production, sales, or other uses. You’ll need to consider these things when determining how many individuals will be on site, both employees and customers.
Be sure to check if there are any local regulations that have minimum requirements for things like the number of parking spaces, handicap accessibility, restrooms, and maximum number of persons allowed inside the building. You should also check for safety and fire code requirements, which may include things like displaying fire evacuation routes and having fire extinguishers or first aid equipment onsite.
If you are a retailer, our guide on planning your retail store layout may help you further. It covers floor plan ideas, traffic flow and customer behavior considerations, Americans with Disabilities Act (ADA) compliance details, and more.
You’ll want to make sure the space you’re thinking of leasing is well within your budget. To do so, take into consideration the price per square foot and compare it to similar buildings within the area. Be sure to consider all of your options and factor in potential additional expenses. Oftentimes, rent can be negotiated based on your business qualifications and building accommodations you require.
Depending on the type of lease you get, make sure you also factor in additional expenses such as the following:
- Utilities (such as water, trash, and electricity)
- Common area maintenance fees
- Build-outs or building modifications (such as the addition of shelves of other business equipment)
- Potential rent increases, if you plan on renewing your lease
Step 3: Find a Commercial Real Estate Broker
Commercial real estate brokers are typically responsible for the facilitation of commercial leases. Whether it be through a listing agent or tenant broker, they will provide you with the details and documentation of a property.
Listing agents are chosen by a property’s landlord to find a suitable tenant. They are typically expected to list commercial properties, screen potential tenants, and present proposed lease terms to the landlord for consideration. They can also be involved with negotiations of the lease terms, including preparation and oversight of the paperwork necessary to finalize the lease agreement.
As a business owner looking for a lease, you may want to consider using a tenant broker. They represent your interests, as opposed to listing agents who work for the landlord. Tenant brokers can also act as a second set of eyes to ensure that the terms of your commercial lease are fair.
Ultimately, you can gain more negotiation power because of other advantages you’ll get with a tenant broker on your side, which include:
- Gaining access to more real estate listings
- Obtaining more accurate data on commercial lease terms, including market pricing
- Getting more insight into available financing options
- Acquiring updated and local knowledge of market conditions
How to Choose a Commercial Real Estate Broker
When choosing a commercial real estate broker, prioritize expertise and qualifications. Consider your personal and professional networks when trying to find a broker to work with. Referrals from these sources can give you first-hand insight as to the kind of experience you can expect to receive. You can also use online resources to search for licensed real estate agents and brokers, such as The Broker List.
Here are some questions to ask when choosing a broker:
- How long have you been in business?
- How have your previous clients rated your service?
- How much experience do you have with commercial leasing?
- How many transactions do you do on an annual basis?
- How knowledgeable are you about the local market?
- How do you keep up-to-date with changes in market conditions?
- How large is your team and how quickly can I expect a response if I have questions?
- How are you compensated?
- Do you have a fiduciary duty to any parties involved in the transaction?
Once you’ve satisfied these qualifications and chosen a broker to represent you, you may be asked to sign a contract. Contracts can come in the form of either an exclusive or nonexclusive arrangement.
If you’re looking for a commercial real estate loan, check out RCN Capital. It offers various loan programs including fix-and-flip, multifamily, construction, and more. To learn more or submit an application, you can visit its website.
Step 4: Find the Right Commercial Property
Finding the right commercial property for your business needs will require effort on both your part and your broker. Ideally, the broker will provide you with a variety of real estate listing options, or you can do some research yourself.
There will likely be some form of trial and error when reviewing properties. Be sure to visit multiple before signing a lease agreement, to ensure you find a property that fits your needs and budget. Not only can this give you more negotiating power, but it can also provide you with information on average lease prices and terms.
After searching for properties and finding one that may work for you, you should conduct multiple walkthroughs to check that the space is in good condition and provides all the features and accommodations necessary for your business. It’s also a good opportunity to see how the property has been previously managed and maintained.
Conducting a physical walkthrough of a property can give you an idea of what repairs, additions, or modifications you’ll need to complete. Depending on the extent of these items, you may want to bring along a licensed contractor to one of these walkthroughs as this can help you get a more accurate estimate of the associated renovation costs.
You can learn more about this in our guide on commercial tenant improvements. In some cases, it’s possible to have the costs of these improvements covered by your landlord.
Before signing a lease agreement, you should review the landlord’s credentials and management history. Since you’ll likely be locked into the lease for multiple years, you should understand what type of landlord you’re dealing with.
For example, have they demonstrated flexibility in the past with agreeing to changes to rental agreements, do they have a history of extending or renewing leases, and do they typically raise prices at the end of the term? Do your due diligence now to avoid complications later on.
Step 5: Understand & Choose the Type of Lease Best Suited for You
Most common commercial leases can be structured in one of three ways: a full-service lease, a net lease, and a modified gross lease.
Step 6: Request, Negotiate & Execute Lease Terms
Once you’ve determined you want to lease a property, the final steps involve submitting a formal leasing request, negotiating terms, and signing the required documents.
If you’re working with a broker, it may have a standard form used for negotiations. If not, you should prepare a letter of intent (LOI) that goes through the terms you’re requesting and why you would make for a good tenant. At a minimum, your LOI should also address the following:
- Description of your business history, products, and services
- Explanation of why you would be a good tenant
- Information on how your company would complement other businesses in the area
- Commercial lease terms you’re seeking, including pricing, type, and length of lease
Many commercial leases use the same type of verbiage and terms. We’ve provided a list of the common terms below along with definitions.
Term | Meaning |
|---|---|
Use Clause | This determines the type of business that can use the space. For example, some spaces are zoned for retail while others are zoned for office spaces. |
Length | Commercial leases typically range from 3 to 10 years. A short lease can be advantageous because it gives a business flexibility and reduces any future financial burdens. |
Assignability | If a lease is assignable, it means you can sublease the property or sell the business with the lease included at a future date. |
Capital Expenditures | This details who is responsible for repairs, maintenance, and other costs associated with the property. Net leases will place this on the tenant; a full-service lease will place this on the landlord. |
Rent & Escalation | Leases will stipulate the monthly and annual rent, along with any future escalations or increases in rent. Most rent escalations average 3% annually. |
Deposit | Typically up to 6 months of rent, the deposit protects the landlord from a delinquent tenant or a tenant that causes excessive damage to property. |
Build-out Credits | These represent the ability for a tenant to make leasehold improvements in their commercial space at the landlord’s expense. Build-out credits typically reduce the rent, reimburse the tenants, or have the landlord pay out of pocket. |
Termination Clause | This allows either party to terminate the agreement under specific conditions. |
Rent Abatement | If the commercial property is damaged, the tenant will pay a reduced amount of rent until the damage is fixed. |
Gross-up Provision | If a building has a significant vacancy, the landlord can estimate what the variable operating expense would have been if the building had been fully occupied and charge tenants the pro-rata share of that cost. |
Pros & Cons of Leasing Commercial Real Estate
| PROS | CONS |
|---|---|
| More flexibility to negotiate terms of lease | Monthly payments can be higher compared to purchasing the property with a mortgage |
| Lower upfront costs as there are no down payment requirements | You will not be building equity in the property |
| Flexibility to change location at the expiration of the lease if business needs change | Cost of lease can increase upon renewal |
| You may have greater tax benefits compared to a purchase | Lease renewals are not always guaranteed and may require your business to change location |
Frequently Asked Questions (FAQs)
Generally, most commercial real estate leases last anywhere from one to ten years. It really depends on your business needs and the terms you negotiate with the landlord.
If you are looking to negotiate a renewal or price change of your current commercial lease, approach your landlord and ask if they’re willing to extend the current lease, with differing lease terms should you need it. If you’re presented with a price increase and are looking to negotiate, you can do so by comparing similar properties in the area, accommodations, and other rental rates offered to similar businesses. You can use your findings as leverage during negotiations to secure better rental rates and terms.
When leasing commercial real estate, the applicable steps are ensuring leasing is your best option, determining what kind of property you need, finding a real estate broker, visiting multiple properties, choosing a lease type, and lastly negotiating and signing the lease agreement.
Bottom Line
Renting commercial properties requires a few actionable steps of a business, from researching and visiting potential properties to negotiating and signing an agreement. Now that you know how to lease commercial real estate and can put these steps into action, be sure leasing is the best option for your business needs and weigh the pros and cons before proceeding.
