For commercial real estate professionals, a portion of our day is consumed negotiating leases. These can be renewals – someone stays put; or new deals – which are triggered by a relocation.
Depending on your specialty, up to 90% of your time is spent in lease endeavors. Compare this with a residential agent and you find the opposite – 90% in the sale of homes vs the lease of homes.
So, with so much of a commercial real estate broker’s bandwidth filled with lease conversations, we get pretty good at the “ask.” In other words, what to seek from a landlord. If you find yourself in the midst of such a back and forth, consider the points below.
Rental rate: Folks in the industry speak in terms of per square foot. You, meanwhile, are most likely concerned with the size of the check written each month. Regardless, both are important. Why? Prices per square foot provide a benchmark by which alternatives can be compared. And, the total allows you to determine affordability.
Your rent will be net of operating expenses (known as a triple net or modified net figure) or included within the sum (gross, full service, modified, or industrial gross). Each has its pros and cons. Make sure your professional explains.
Term: Your enterprise is committing to leasing a building for a period of time. Generally, the smaller the space, the shorter the term. As an example, incubator locations with fewer than 5,000 square feet are month-to-month to two years whereas a 250,000-square-foot logistics hub might carry a 10-15 year arrangement.
Increases: Unfortunately, your rent will increase throughout the period of the tenancy. In theory, these are tied to inflation. But, with inflation all but flat, a bump of 3-3.5% per year is standard. The crazy thing is, rents have increased far in excess of 5% per year for the past two years.
Tenant improvements: Generally, this will fall into one of two categories — special purpose or general purpose. Think of the former like a chef’s kitchen for your home. Sure, you may require a 12-burner Viking range but will the next occupant find value in it? If the answer is no, most owners won’t spring for it. Conversely, an upgrade of the power that feeds the plant will appeal to the next resident. Therefore, you may find a willingness to participate in the expense.
Refurbishment: Typically this involves paint, carpet, flooring and cleanup. Depending on how recently the landlord rolled over a tenant, refurbishment may be more involved.
Extension rights: Relocating is expensive, time consuming, disruptive and inefficient. Therefore, in addition to the initial term of your lease, consider requesting an ability to stay past the expiration. Also known as “options to extend,” your tenancy is preserved if you decide to exercise.
Options to buy: Rarer today than an open amusement park, options to buy are a concession frequently sought by a prospective tenant and seldom given by an owner. Ask away. Expect the answer to be – ummmm, no.
Opt-outs: Seen this year with office leases – where space need uncertainty prevails – flexibility is achieved. Given is the right to walk away before the lease term expires. If a parcel holder agrees, expect there to be a penalty.
Free or abated rent: The difference? Free is free and can’t be clawed back if you default, whereas abated rent can be. Some relief – in either flavor – can ease the expense of a move.
Form of lease: Finally, your agreement will but placed into a contract for both parties to sign. This becomes the document from which rules are noted, obligations created and a mechanism for settling disagreements outlined. Therefore, the form is critically important, so make sure you know what the owner is proposing and seek counsel.
Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at abuchanan@lee-associates.com or 714.564.7104.
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