To get a commercial lease that’s well-suited for your business needs, you’ll need to have a good understanding of what the process entails—you’ll need to be aware of the different types of leases, what property characteristics to look for, and how you can negotiate lease terms. Read on for our step-by-step guide on how to lease commercial real estate (CRE).
Step 1: Verify That a Lease Is Your Best Option
Before you get too far into the process of 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.
Meanwhile, 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 CRE. We’ve also summarized some of the pros and cons of a lease below.
|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|
Step 2: Identify the Property Characteristics You Need
Once you’ve decided that a lease is the best option for your business needs and goals, your next step will be to make a list of what features and characteristics you want in a property. This can be influenced by your industry and type of customer. Some examples of characteristics to consider are a building’s location, size, and cost.
When it comes to real estate, location is arguably one of the most important things you should consider. This can impact your employee talent pool and foot traffic from customers. It can also have implications for the type of activities your business can conduct based on local zoning regulations.
- Location to complementary businesses: Being close to other businesses with products or services that complement those of your own can bring in additional customers. 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’ll 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 with your local chamber of commerce to see if there are any restrictions that may affect your business.
How you operate your business will determine what you need in terms of property size and layout. This will depend on how many individuals you expect to be onsite at any given time. Also, consider things like how many parking spaces you’ll need to accommodate your employees and customers.
As always, check if there are any local regulations that have minimum requirements for things like number of parking spaces, handicap accessibility, restrooms, and the maximum number of people 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, customer behavior considerations, Americans with Disabilities Act (ADA) compliance details, and more.
To ensure you’re getting a good rate on your commercial lease, you can look at the price per square foot and compare it to the average for your area. The price you pay can often be negotiated and may be impacted by your business performance and building characteristics you’re seeking.
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 CRE Broker
CRE leases are typically handled by either a listing agent or a tenant broker. 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
Working with a CRE broker simplifies the process for a tenant, but it’s not required. If you decide to get a commercial lease without hiring a broker, you’d need to find properties, schedule listings, and negotiate the terms of the lease by yourself.
Consider your personal and professional networks when trying to find a broker to work with. Referrals through either of these sources can give you first-hand insight as to what kind of experience you can expect to receive. You can also use online resources to search for licensed real estate agents and brokers. One example is 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 found an individual to work with, you may be asked to sign a contract. Contracts can come in the form of either an exclusive or nonexclusive arrangement.
A. Exclusive Arrangement
With this type of arrangement, you agree to work only with one broker for a specified period. The time frame is typically for up to one year and outlines the fees payable to the broker if it finds a suitable commercial lease for your business.
B. Nonexclusive Arrangement
Two main types exist.
- Right to represent: This is similar to an exclusive arrangement but gives tenants the flexibility to also work with other brokers. Upon locating and executing a commercial lease, fees would still be due and payable as they would be in an exclusive arrangement.
- Not for compensation: Perhaps the most flexible type of arrangement, this primarily only allows the broker to schedule listings for you and represent you to potential landlords. However, the downside is that the broker has fewer fiduciary duties in representing a tenant’s interests.
Step 4: Find the Right Commercial Property
Finding properties for your business can be a joint effort between you and your broker. Alternatively, you can have your broker do all the legwork in searching through listings for locations well-suited to your needs.
You should review multiple properties before making any final decisions. Not only can this give you more negotiating power, but it can also provide you with information on average lease prices and terms.
Once you’ve found a property, it’s a good idea to conduct multiple walkthroughs to ensure it meets the criteria you set for what you need or want in a property. It’s also a good idea to check the landlord’s history and how they’ve managed other properties in the past.
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.
Leases are typically multiyear agreements, so it’s recommended that you understand the 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?
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 found a property that suits your business needs, the final steps of getting the lease involve submitting a request, negotiating, and executing the final paperwork.
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 explains 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.
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.
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.
If a lease is assignable, it means you can sublease the property or sell the business with the lease included at a future date.
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.
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.
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.
This allows either party to terminate the agreement under specific conditions.
If the commercial property is damaged, the tenant will pay a reduced amount of rent until the damage is fixed.
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.
Now that you’ve learned how to lease commercial real estate, you should understand how it can help you and what you should look for. Renting commercial properties can be structured in several ways, each with its own set of pros and cons with regard to payment amounts and other lease terms. Before making any final decisions, we recommend looking at multiple properties as this can give you a better understanding of your available options and typical lease terms in your area.