Criteria to Consider When Renting Commercial Space

Criteria to Consider When Renting Commercial Space
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This story appears in the September 2015 issue of Entrepreneur. Subscribe »

Q: Any advice on how to lease my new location without getting ripped off?

A: Renting commercial space can mean stepping into a minefield of hidden costs and steep fees. The commercial real estate field is full of experts with deep experience who tend to be aggressive, especially with newcomers. My first bit of advice is to start your search for your next space well before you need to move. The more time you have, the more leverage you’ll have during negotiations.

But before we tackle your negotiating strategy, let’s start with the basics. How much can you afford? Where do you need to be—near suppliers, customers, transportation hubs? How much square footage do you need? Which features do you require (private offices, open meeting spaces, a showroom, a warehouse with receiving dock)? And which ones do you want to make your business more efficient (on-site employee parking, an inexpensive power source)?

Use this list of criteria to shop for a commercial real estate broker, looking for one who focuses on tenant-side work and has an encyclopedic knowledge of your desired location. Don’t worry about the commission, which is paid by landlords on both sides of commercial leases.

It’s not until you and your broker have come up with at least two or three candidates that you should start negotiating for your first choice. Be ready to walk away—and mean it. Let your broker handle the talks. If you’re lucky, you’ll get a broker like the one I had when I ran a search for new space for a medical device research firm. He came up with a list of available spaces (and prices) that fit our needs, then took that list to our current landlord, who almost fell over himself to give us a deal better than anyone else’s.

Last tip: After your broker has negotiated a satisfactory deal, hire a real estate attorney to examine the lease document. You want a lawyer who negotiates leases every day, not your general counselor. The real estate attorney will point out all the traps in the draft lease, as well as missing items that should be added into the lease for your protection.

The List

When shopping for a new space, I set up a spreadsheet to track and compare all criteria and variables. Here are some points to consider for your own list.

• Rent. Ask how the chargeable square footage is measured and calculated so you can make apples-to-apples comparisons between buildings.

• Lease term. When does the lease start, and when does it expire? Can you live with a long-term lease (better deal) or would you prefer a shorter term with renewals? Landlords will prefer one or the other based on their own needs, especially considering the debt they have on the building and their lenders’ requirements.

• Rent increases. How are they calculated, and are they automatic?

• Extra costs. This includes utilities, taxes and insurance, as well as common area maintenance, or CAM, charges.

• Prepaid rents and/or deposits. Just like they do with apartments, landlords of commercial buildings may ask for a variation of first and last months’ rent and a security deposit before move-in.

Cost of improvements. These costs are often paid by the landlord, who will roll them into the rent, prorated over the length of the lease. Depending on your business, this can involve big dollars, but a landlord often has flexibility here, especially if his lender is cooperative. The bank may agree to lend more to the landlord in exchange for the less-risky cash flow that comes from a long-term lease with a good tenant.

Conditions of the build-out. Who needs to approve it, and who supervises it?

• Maintenance and repairs. Unlike residential leases, commercial leases often require the tenant to pay for all mainte- nance, except for that of exterior walls, roof and common areas.

• Right to sub-lease. Under what condi- tions can you sub-lease the space?

• Exclusivity rights. If you’re in retail, you need exclusivity so competitors can’t open a store in the same building or complex.

• Right to assign the lease to a new leaseholder. I once had a landlord hold up the $120 million sale of my company while we waited for his approval of the lease assignment.

• Inventory liens. If you keep inventory, does the landlord have an automatic or senior lien on your inventory if your business goes south? (This varies by state law and lease terms.)

Edition: October 2016

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