Whether you just started your business, or you have been around awhile and need to expand. Renting commercial real estate is something that has a lot of hidden aspects to it.
Most of our experience in renting real estate comes from renting residential real estate, which is a very straight forward process. You submit an application, go through a background check, and then sign a lease. Commercial real estate however, has more moving aspects.
When looking at commercial space, Landlords understand there are specific needs different types of businesses need in order to function, and as such there more negotiable terms involved. I always like to break it out in three separate categories that all relate to one another:
The typical range of a commercial lease falls in the 3-7 year range. The reason for this is it provides security to the landlord. Dependent on other items of negotiation, the landlord may be putting money into the space for the tenant. They need a lease of this length to help recoup these potential expenses. There are circumstances where you can negotiate a shorter term lease, but the landlord would expect that to reflected on other items of negotiation.
As mentioned above, tenants may want or need specific improvements made to the space in order for them to do business as they would like. The tenant may want paint and updated flooring put in, as well as walls put up to create private offices, or kitchen equipment installed. These items can be costly (especially for a start-up) and so there is usually room to negotiate the payment of these improvements by either the tenant or landlord. If the tenant requests the landlord to pay for improvements, the landlord may want a longer lease signed, or a higher lease rate to compensate for this.
Perhaps the most obvious of negotiation categories. People may not be aware, but the price of a commercial lease is almost always negotiable. This is usually the item we use to make the terms of the other two categories work for the tenant. If the tenant is ok with taking on a longer lease, we can then negotiate a lesser starting price. If the tenant wants to have the landlord pay for improvements, we can then use price as a negotiating tool to incentivize the landlord to do so. Price should be the most flexible category of negotiation, but all three act together to agree upon a lease.
A Couple Other Things
We often get asked the question, why is the landlord asking for such a high price when the entire building is vacant? The answer is, if the landlord fills up the building with a bunch of under market value leases, then that means the potential income of the building is under market for the length of those leases, and as such the value of the building goes down. The landlord is better off marketing the building based of the projected income from full market rents.
Another way the landlord can combat this is by instead of lowering the rent for a tenant in negotiation, they offer a certain amount of months for free to lower the overall cost of the lease term for the tenant. This still allows the landlord to show they are getting fair market rents, while allowing tenants into space for a cheaper rate.
We also like to make people aware a tenant can hire an agent to represent them just like a buyer’s agent in a real estate transaction. The payment structure is similar where the commission usually comes out of the proceeds of the lease. This allows the tenant to have adequate representation, while that representation is compensated from the landlord.
Please keep us in mind for when you or someone you know is looking for commercial space!