A Guide to Commercial Lease Structures, Terms, and Negotiation

02/06/2024

Are you planning to lease commercial space for your business? Understanding commercial lease structures, common terms, and negotiation strategies is crucial to secure the best deal for your enterprise. In this guide, we’ll walk you through the basics of commercial leasing, including the consultants who should be involved, as well as how a reputable general contractor can assist you in the process.

Common Terms in Leasing

Within the commercial real estate space, there are many terms that get thrown around. These can be daunting if they’re not a part of your everyday discussions. Your relationship with your landlord will be defined by your lease agreement. A lease agreement, also known as a rental agreement or lease contract, is a legally binding contract between two parties: the landlord (property owner or lessor) and the tenant (person or business renting the property). This agreement outlines the terms and conditions under which the tenant is granted the right to occupy and use the landlord’s property for a specified period, typically in exchange for payment of rent.

Here are some of the basic terms related to lease structures and common leasing terms: 

Commercial Lease Structures

Gross Lease: In a gross lease, the tenant pays a fixed rent, and the landlord covers all operating expenses, including property taxes, insurance, and maintenance. This structure simplifies budgeting for tenants.

Net Lease: Net leases shift some operating costs to the tenant. Common variations include Single Net Lease (tenant pays property taxes), Double Net Lease (tenant pays property taxes and insurance), and Triple Net Lease (tenant pays property taxes, insurance, utilities, and maintenance).

Percentage Lease: Typically used for retail spaces, this lease structure involves a base rent plus a percentage of the tenant’s monthly sales. It’s a win-win for both parties if the business thrives.

Common Lease Terms

Rent: The amount you pay for using the space. Ensure it’s within your budget and competitive for the location.

Term Length: Decide how long you’ll lease the space. Shorter terms offer flexibility, while longer terms can secure better rates.

Security Deposit: A refundable amount held by the landlord to cover potential damages or unpaid rent.

Operating Expenses: Know which expenses you’re responsible for (common area maintenance, property taxes, utilities, etc.) and negotiate accordingly.

Rent Escalation: Understand if and how your rent will increase over time, whether it’s fixed increases or tied to the Consumer Price Index (CPI).

Tenant Improvement Allowance: This is the dollar amount the Landlord is willing to contribute to building upgrades or modifications.

Effective Lease Negotiation Tips

Do Your Homework: Research comparable rents in the area to gauge market rates. Knowledge is power in negotiations. Your real estate broker will be critical in helping you find comparable spaces to review the local rental market.

Seek Legal Advice: Consult an attorney experienced in commercial real estate to review the lease agreement and ensure it aligns with your interests.

Negotiate Terms: Don’t hesitate to negotiate terms that favor your business, such as rent reduction, tenant improvement allowances, or favorable exit clauses.

Inspect the Property: Prior to signing, inspect the property thoroughly for any necessary repairs or improvements. Ensure the landlord addresses them before occupancy.

Understand Renewal and Termination Clauses: Know how to renew the lease or terminate it if needed. Plan for your business’s future, and understand what your landlord’s rights are as the property owner.

Get It in Writing: Ensure all negotiated changes are documented in writing and incorporated into the lease agreement.

Consider Hiring a Broker: A commercial real estate broker can assist in finding the right space and negotiating on your behalf.

Your General Contractor’s Role in Leasing

There are several real estate professionals that play a role in leasing commercial space: your real estate broker, banking partner, an architect or engineer, and general contractor. Depending on the type of space you’re interested in, there may be other consultants that should be involved. A general contractor (GC) can help in several ways. The most obvious is to complete any building upgrades, but they can be involved even earlier than that.

  • A commercial GC can do a pre-purchase inspection to identify areas of concern or anticipated future expenses, such as:
    • Roof condition and lifespan.
    • Building envelope condition
    • Code compliance issues/ADA upgrade requirements
    • Mechanical, plumbing, fire protection and electrical system life expectancies
    • Site deficiencies or needed upgrades
  • Your GC partner can create early budgets for modifying the space to your needs based on preliminary information. This may be valuable to complete for several spaces at a high level to identify affordability and complete your lease negotiations.
  • Depending on the scope of work required to make the space ready for occupancy, your general contractor can develop realistic schedules to help with your planning.

Utilizing your GC before you’ve ever signed a lease is the best way to ensure that the road through construction is done with few surprises and is completed as quickly as possible. Pre-lease building inspections can also help rule out spaces that might be too expensive or time-consuming before you continue more extensive negotiations.

Final Thoughts

The process of leasing a commercial space can be daunting. Having a basic understanding of lease structures and terms is helpful. And, with the right partners on your team to identify what you need, the stress of the process can be reduced. Finally, each lease is unique, so tailor your negotiation approach to your specific situation and needs.

If you’re ready to engage in finding a new space, contact us today. We can get you started.