Leasing commercial retail space is one of the biggest investments you will make for your business. Not only will you have a variety of options to choose from, each property offering a variety of pros and cons, but commercial retail leases are often complicated in and of themselves. Here is a brief guide on how to negotiate the best terms for your commercial retail lease.
How to Negotiate a Commercial Lease
You can avoid the first major pitfall by simply having a lease. Never rent commercial space without a lease. Renting on a monthly basis means that the landlord can kick you out of the space with very little notice. If you are displaced, you will lose the value of any renovations that you have made to the property. Not only that but if you do not have a lease, it is often harder to obtain any kind of bank financing for your business.
Typical Commercial Lease Terms
There are several kinds of commercial property leases. These are:
- Single net leases
- Double net leases, also called net-net
- Triple net leases
- Gross net leases
- Modified gross net leases
- Percentage rent leases
Single Net lease
In a single net lease, the tenant is responsible for paying the base rent and one of the following: property taxes, utilities, or insurance. The landlord is responsible for all maintenance and other expenses.
Double Net lease
With a double net lease, the tenant pays the base rent plus two of the following: property taxes, utilities, or insurance. The landlord is responsible for all maintenance and other expenses.
Triple Net lease
Triple net leases require the tenant to pay the base rent plus property taxes, insurance, and utilities, as well as maintenance and all other operating costs. The landlord may agree to cover the cost of any structural repairs to the building.
Gross Net or Modified Gross Net Lease
Gross net leases require the tenant to pay a fixed amount that includes the base rent and all incidental expenses, including common area maintenance (CAM) and things such as landscaping and property management fees.
A modified gross net lease is similar to a gross net lease, except that the tenant and the landlord agree to split some of the incidental costs.
Percentage Rent Lease
In a percentage rent lease, the tenant pays the base rent plus a percentage of gross sales over a minimum amount. These types of leases are generally used for multi-tenant spaces such as malls.
Negotiating a Commercial Lease
Now that you have a basic understanding of the types of leases that are out there, there are a few more things you need to do before you even contact any landlords. The following are some things to research and decisions to make before you enter into any lease negotiations:
- Get an agent like LCI Realty or an attorney to represent you in the negotiations.
- Determine your company’s space needs, budget, and preferred location.
- Research market rents.
- Research properties.
Tips for Effective Lease Negotiations
Let’s say you have your budget, your representative, and your eye on several properties. Now, it’s time for the nitty-gritty. Here are 17 tips for effectively negotiating your retail lease.
- Let your agent or lawyer do the talking for you.
They are better equipped to negotiate the lease. In most cases, they have negotiated leases with the landlord previously, especially if you are looking at a mall location.
- Negotiate with more than one landlord simultaneously.
Give yourself the upper hand by making landlords compete for your business. This way, the landlords know you are serious, and they will be aware that they are competing for your business.
- Do not pay the first base rent offered.
Landlords do not usually expect tenants to pay the first price stated. Counter with an offer that is 10-15% lower than the initial asking price.
- Do not be afraid to ask for tenant incentives.
If the landlord is not flexible on base rent, see what kind of incentives you can negotiate. These incentives could take the form of financing or partial payment of your renovation costs or two to three months of free rent at the beginning of your lease term.
- Validate the square footage yourself.
Commercial leases are paid based on the square footage of the space. You do not want to wind up paying for space you do not actually have, so be sure to take some measurements.
- Negotiate a longer lease term in order to get a better base rent.
Landlords want their properties to be occupied and are often willing to bring down the base rent if you lengthen the lease term. Commercial leases are generally two to three years, but if you cannot commit to a full three years, try negotiating for favorable renewal terms.
- Look for free rent.
Free rents in the near term might be available on properties that have been vacant for a long time. Getting the space rent-free while performing any renovations is a good negotiation point.
- Look for termination conditions.
Everything is negotiable, and early termination penalty fees are no different. Check for things such as what happens if the building is sold. Can you be kicked out for missing a rent payment? What happens if you need to break the lease to expand your operations? Make sure your early termination conditions are acceptable.
- Leasehold improvements should be negotiated.
Make sure any changes are allowed under current zoning restrictions before signing your lease. Include a clause that requires the landlord to pay for some or all of any improvements should they be the one to terminate the lease.
- Review renewal terms.
Negotiate what happens at the end of your lease. Know when and how the lease will be renewed.
- Do not rush to sign.
Because the landlord or their agent prepares the lease paperwork, it is crucial to take the necessary time to review the documents carefully. Ensure that all of the agreed-upon clauses have been included and that all the dollar amounts are correct.
- Negotiate a “cure” period.
If you should have to breach the terms of your lease, a “cure” period is a time that you are given to rectify the breach. One example is being late on your lease payment (even just one day). Without a cure period, you could be liable for fines or legal action.
- Include a sublease clause.
Should you need to move for any reason, a sublease clause will allow you to rent out the space for the remainder of your lease term to save on early termination fees or rent for space you are not using.
- Include a co-tenancy clause.
If the space you are leasing is in a mall with a major anchor store that will drive traffic to the area, you need to have a co-tenancy clause that allows you to break your lease with no penalty should that anchor store leave the mall.
- Insist on a no-compete clause.
In shared spaces or areas where the landlord has multiple properties, insist that none of your competitors can be allowed to lease in the same area. The last thing you want to do is to be in competition with the guy next door. Be very specific on what type of business you consider to be a competitor.
- Check HVAC terms.
Try turning over the maintenance and repair of the HVAC systems to the landlord. While this may seem like a small detail, it could wind up costing you thousands if you are responsible for HVAC repairs.
- Negotiate the fixturization period.
You will need to do some renovations on almost any space that you rent. Regardless of how long renovations take, you shouldn’t be expected to pay for those changes and rent at the same time. Some landlords may opt to renovate the space for you as long as you are paying rent. You might ask for up to three months of free rent to allow time for permitting and renovations to be completed instead.
Leasing Commercial Properties in Phoenix
If you are interested in leasing commercial properties in Phoenix, we can help. We know the local market and can advise you of the going rates for rent, available tenant perks, and where the best locations are for your business.
At LCI Realty, we are here to assist you with all of your commercial property needs. Contact us today for a free property analysis, today.