When a company is looking for its next office building, retail front, showroom, or industrial space they’ll often opt to lease a commercial property instead of purchasing a space or building — mainly because it requires less capital. A commercial lease also provides the tenant with a bit more flexibility should their company need to expand in the next few years because they aren’t locked into a building that they purchased, they only need to ride out the lease terms.
While browsing for a new office space can be exciting, there are a lot of details that need to be worked out before everything falls into place. These details are placed within a lease agreement between the landlord and the tenant that states the terms of the leasing of the commercial property. But how do you negotiate commercial lease terms that align with your company’s needs? Let’s take a look at the various types of commercial leases and tips for negotiating your commercial lease.
The Types of Commercial Leases
There are three primary types of commercial real estate leases for tenants to be aware of in this market. These are the Full-Service Lease, Triple Net Lease, and the Modified Gross Lease. Before embarking on your journey to find your next space to rent, you must understand these three types of commercial leases to ensure you’re signing terms that align with your wants and needs.
To help better understand these three types, here is a brief overview of the different types of commercial real estate leases to be aware of:
A Full-Service Lease
A Full-Service lease refers to an agreement where the tenant’s rent pays for all of the property’s operating expenses. This means that the tenant’s rent is built to cover expenses such as property taxes, utilities, maintenance, and even janitorial for the commercial property. The landlord will physically make these payments, but the money for the payments is supplied via the tenant’s rent payments.
While the rent on a full-service lease is typically higher than a few of the other lease types, it’s often the preferred lease amongst tenants because it ensures their rent remains fixed throughout the lease. Tenants will pay the same fixed rate every month which allows them to better forecast their financials.
Full-service leases are most popular for multitenant office buildings
Triple Net Lease
Unlike the full-service lease, the net lease is often a lower base but is highly adjustable based on the specific terms set in the commercial lease agreement. The Triple Net Lease (“NNN”) is one of the most popular types of leases due to being favorable to the landlord, the triple net lease requires the tenant to pay base rent. The tenant also pays for the property taxes, insurance, and common area maintenance above that base rent.
Modified Gross Lease
A modified gross lease is known as the happy middle ground for landlords and tenants. In this structure of the modified gross lease, the Landlord pays for the property taxes and building insurance from the tenant’s rent, while the tenant pays for maintenance. There is potentially more room for negotiations during the lease negotiation phase. This allows for tweaks to the amount owed for operating expenses.
4 Tips for Negotiating a Commercial Lease
When in the market to rent a commercial space, you need to be ready to negotiate for the best deal. It’s a common misconception that rental rates are set in stone — with the right tools and knowledge, you can negotiate terms that suit your company’s needs. Here are four tips to follow when negotiating your next commercial lease agreement:
Extend the Commercial Lease Term
Depending on your company’s growth goals and business needs, you might determine that you want to stay in the commercial space for longer than the standard lease period. If extending the lease term makes sense for your business, negotiate with the landlord for a longer lease term with a lower rate. They’re more likely to lower the rate knowing that they will have a tenant in the space — it’s easier for them to keep you there than to find a new tenant so you can use this to your advantage during the negotiating process.
Research Comparable Spaces
Before signing a commercial lease, you must research comparable spaces in the same area and see what their going rates are. Is the space you’re considering grossly over- or under-priced? If the price seems way off in either direction, you may want to look into the reasoning. If it is misaligned with the current market rates, you can likely talk the landlord down to a more comparable price point.
Double-Check the Calculations
The rate of the commercial space you’re leasing is not only based on the square footage of the space you’re occupying, but also on a portion of the square footage that is shared with other tenants in the building — such as common areas like lobbies, shared restrooms, hallways, and building amenities like a fitness center. The cost of the square footage of these spaces is split by all the tenants in the building. This means it’s important for you to determine the amount of rentable square footage used to calculate the rent using a metric known as the Load Factor. Talk to the landlord to determine how they calculate the Load Factor and double-check their math to ensure everything adds up.
Get Help from Commercial Broker
Enlisting the help of a commercial real estate broker to negotiate your commercial lease can not only save you time but save you money as well. With their experience and knowledge navigating the commercial real estate market, they’ll know exactly what steps to take to get you the best rate on the lease.
Call Price Commercial Properties for Commercial Lease Help
When leasing a new commercial space, it’s your responsibility to read through all the terms and make sure they align with your business needs. Should changes need to be made, you’re the sole person in charge of asking for modifications to the agreement and obtaining the best rate for the term of your lease. While there are plenty of tools to help you negotiate the lease on your own, it can be beneficial to hire a professional commercial real estate broker to ensure you get the best rate possible. Price Commercial Properties has the knowledge and know-how to assist.