Small, independent businesses taking their first steps into the commercial real estate market can feel like they’re at a disadvantage compared to large-size businesses with deep enough pockets to hire all the resources needed to protect their interests and negotiate the best terms on a commercial space for lease.

But with a bit of study, planning and the right team by their side, small businesses can level up the playing field for the same chance at success.

First Things First: Learn the Commercial Space for Lease Lingo

While you don’t need to study like you’re prepping for a bar exam, becoming better-versed in common commercial real estate leasing terms and current commercial market trends won’t take much time, but it’ll save you lots of it as you deal with everyone involved in the commercial real estate ecosystem.

Take Note of Timelines

A commercial real estate lease for a new business can take up to six months to negotiate. Make sure you factor in this period, plus time for exploring financing and renovating, so you’ll be ready to move in and open on schedule. Add a buffer period to all timelines as well, just to be safe.

Set Up Your Team

If your business is successful enough to warrant its own space, you likely have an accountant you already work with who’s created an over-arching budget for your big plan. They’ll need to revise it as you get more detailed information on leasing costs and decide on your lease term.

You’ll also want to add a commercial real estate lawyer who specializes in leasing to assist you in drafting, analyzing and negotiating your agreement so that you can benefit from their experience and an unbiased opinion. If they also have experience with zoning and permitting, you’re gold.

Assuming you’ve done a strategic analysis to find the best location for your business and maybe even scouted out a few areas, you’ll want to enlist the services of a commercial real estate agent. Leasing commercial space is a complex process that can impact your business not just today or tomorrow but well into the future. The right commercial real estate broker will not only work hard to find you the right commercial space for lease but, along with your lawyer, will guide you through the process from start to finish.

Lastly, since most commercial real estate spaces require some sort of renovation before tenants move in, and because you’ll want them alongside your on-site tours and building inspections, you should also draft a preferred contractor onto your roster. If you don’t have one, your commercial real estate agent may have contacts you can interview.

Do Your Due Diligence

Research is key to signing the right lease for your business. You can do some of the tasks yourself, but many of them will be resolved quicker if you let your lawyer do the leg work and make time to review their findings afterward.

Key due diligence tasks include:

  1. Vetting Your Prospective Landlord

    Learning more about your prospective landlord is one of the most important parts of due diligence research that needs to be done but is often overlooked. You’re about to enter an important business partnership together, so it’s imperative to know who they are, what their financial situation is and whether you’ll be able to depend on them.

    If your landlord is not the owner of the building you’ll be moving into, it’s doubly important, as your business could end up being evicted in the event of foreclosure – even if you’ve been on time with every payment.

    Your lawyer will conduct a public records search to find out more about the landlord and can also request documents related to the landlord’s business entity to accomplish this task.

    You can do your part as well by:

    • Interviewing co-tenants regarding landlord relations and responsiveness
    • Checking to see how well the building and parking lot are maintained

  1. Confirming Zoning

    Before you sign your lease or even shortlist a location, it’s imperative to ensure the zoning is correct for how you want to use the space today and tomorrow. Your commercial real estate agent can help you with this task, as can your lawyer. It’s especially important to review any zoning variances the past tenant might have had, as these may not apply to your business.

  2. Understanding Leasing Basics

    A lease is a legally binding contract that outlines the terms under which one party agrees to rent property from another. It guarantees the lessee (or tenant) the use of an asset and guarantees that the lessor(the property owner or landlord) is entitled to regular payments for a specified period in exchange.

There is no standard commercial lease. However, all leases must contain a description of the leased premises, the duration of the lease and the amount of the rent, and also state:

  • The type of lease
  • If and how it can be renewed
  • The rules governing rent increases
  • The services provided by the landlord
  • Tenant insurance requirements
  • Obligations for repair and maintenance
  • Leasehold improvements to be made and who will pay for them
  • The amount of the security deposit (if required by the landlord)

You can get more information about the differences between a net vs. gross lease here, but in general:

  • In a gross lease, the tenant pays a flat fee that covers their base rent and all incidentals.
  • In a net lease, the tenant pays a base rent plus certain expenses, depending on the type of lease:
    • In a Single Net (N) lease, the tenant pays base rent and some portion of the property taxes.
    • In a Double Net (NN) lease, the tenant pays base rent, some portion of the property taxes and some portion of the building insurance.
    • In a Triple Net (NNN) lease, the tenant pays base rent, some portion of the property taxes, some portion of the building insurance, utilities and may also be responsible for other maintenance fees or operating costs.

  1. Understanding Exactly What You’ll Be Paying For

    Landlords and owners generally try to transfer as many financial obligations as possible to the tenant, no matter the lease type, but everything within a commercial lease is subject to negotiation.

    If lease-type definitions cause your head to spin, try using plain language instead. Ask your accountant to create a spreadsheet of costs associated with your final two or three location choices, and ask your landlord for both past bills and upcoming estimates for as many items below as possible, including:

  • Base Rent (TIP: Make sure your landlord uses your premise’s usable square feet gross square feet in their calculations.)
  • Property taxes
  • Insurance
  • Maintenance (both interior and exterior)
  • Utilities (water, gas, electric)
  • Internet service
  • Security
  • Parking
  • Leasehold improvements (and who will pay for them)
  • Building repairs (NOTE: these are not usually a tenant’s responsibility)

Pay special attention to:

  • Property Taxes: if you choose a Net lease of any type, you’ll be responsible for at least a portion of these, and if you’re in an up-and-coming area, you could be facing double or even triple-digit year-over-year increases.
  • Leasehold Improvements: As your business moves, the leasehold improvements you make will typically stay with the building, adding to its value in the future. If your business bears all the costs for these, you’re essentially paying for the right to help your landlord make more profit when they lease or sell the building later.
  • Lease Holdover Rate: if you overstay your lease term, your monthly rent could increase to double or more than your current monthly rent. Aim for no more than 125% of your monthly rent or lower if you can.

  1. Cap Costs Where You Can

    To minimize negative outcomes, try to negotiate a cap on the number of increases in rent, property taxes and common area fees within certain ranges based on historical costs.

  2. Negotiate Until You Get it Right

    Make sure your commercial real estate agent and lawyer let your landlord know theirs isn’t the only property on your shortlist, so the landlord is incentivized to add tenant inducements such as a period of free or reduced rent, plus complete or partial payments for leasehold improvements.

  3. Find Out About Financing

    Financing is available to cover everything from leasehold improvements and equipment purchases to moving expenses and marketing. Consider increasing your line of credit as well, so you’ll have added cash on hand.

    Lastly, ask your landlord if they offer vendor financing. Building owners and landlords may offer it to seal the deal with a prospective tenant whose reputation they know will cause others to commit or whose business is especially solid.

  4. Getting Set to Open Your Doors

    In many municipalities, a license or occupancy certificate is required to open a business or industrial facility. Make sure you get any such documents before you sign your lease.

And remember, before you sign any commercial real estate lease agreement, be sure you understand both its terms and the financial implications for your business – now and in the future. Have your lawyer, commercial real estate agent and accountant thoroughly review it, then sign away.

The post What Independent Business Owners Need to Know Before Leasing a Commercial Space appeared first on RE/MAX Canada.