Your First Commercial Lease: How to Prepare and What to Expect

What should a commercial lease include?

Keeping in mind that you should seek professional advice before committing to a lease, here are a few of the major components to look for:

• Lease term/type
• Rent amount
• Security deposit
• Permitted use
• Exclusive use
• Maintenance and renovations
• Exterior appearance
• Insurance
• Americans with Disabilities Act compliance
• Personal guarantee
• Amendment/modification/termination clauses
• Subleasing

Tips for negotiating a commercial lease

If you’ve never negotiated a commercial lease, the process can seem intimidating and overwhelming. Bressman offered a few tips to help first-time lessees through this important business transaction.

1. Understand the full financial commitment.

Before you even begin looking at properties, you need to have a big-picture view of what this lease will entail financially, Bressman said. You should know your company’s current financial health – including cash flow, projected annual revenue and ability to assume risk – before moving forward with a lease. This ensures you understand what you can afford.

Some lessees may consider obtaining a commercial real estate loan to secure a commercial property for their business. As always, it’s important to weigh the pros and cons of going into debt in order to grow your company. Be clear about the potential return on investment before financing the acquisition of commercial space. [Find out more about alternative financing with this small business guide.]

2. Read up on real estate terminology.

Financial preparedness isn’t the only factor determining whether you can lease commercial space. Even if you think you’ve found a perfect location that you can afford, read the fine print before making a commitment.

For example, Bressman noted that a business owner should understand the differences among classes of commercial property (typically A, B and C) as well as the difference between rentable space and usable space. Usable space is strictly the space you occupy and use for your business. You may be charged more for the shared costs of the full rentable space of the building.

“Many additional items are incorporated into the lease agreement, including real estate taxes, utilities, insurance, and maintenance and operating costs of the building,” Bressman said. “This can result in additional costs to the transaction, which business owners should be aware [of]. In addition, the lease will need to include provisions for subletting, expansion and possible early termination.”

Plenty of online resources, such as PropertyMetrics and 42Floors, can give you a basic overview of commercial real estate and help you understand what to expect.

3. Don’t try to do it on your own.

Even if you take a DIY approach to running your business, think twice about going through the leasing process alone. While working with an experienced real estate broker or lawyer may be an expense upfront, it can help you avoid easy-to-make mistakes and negotiate better terms for your lease.

“Business owners, particularly founders of small companies, can … miss nuances and important terms in the documents, which is why a neutral, third-party advisor can help negotiate more favorable terms and know when and where to challenge existing offers,” Bressman said. “It’s also easy for business owners to get caught up in the way a space looks, rather than the terms of the lease, which can impact the space management, operations and financial obligation over the term of the lease.”

4. Think long term.

You may not plan to stay in the space you’re leasing forever, but Bressman reminded business owners to think about the long-term effects your retail or office building will have on your company’s image.

“[With a lease,] you’re also investing in your company’s brand,” he said. “Think carefully about where you want to establish your footprint and what type of image a certain neighborhood or facility conveys. Be sure that your legal and real estate advisors help you design a strategy that works for the future of your business.”

How do commercial leases work?

To start, it is helpful to understand the terminology and the options. There are multiple types of commercial lease agreements.

Full-service leases

In a full-service lease, or gross lease, the tenant pays the base rent, and the landlord pays for the utilities, insurance, taxes and other costs of operating the building. This is where the loss factor of rentable versus usable space comes into play, because the tenant will be paying for a portion of the common areas as well.

Net leases 

In a net lease, by contrast, the tenants pay a portion of the operating costs of the building. Net leases have their own options: single, double and triple net. A triple net lease is essentially the opposite of a gross lease, as the tenant pays not only rent but also the operating costs of the building. This should result in a lower rent but higher variable costs.

Similarly, in a double net lease, the tenant pays for the utilities, insurance and taxes, and the landlord or property owner pays the structural maintenance costs. Finally, in a single net lease, the tenant pays the utilities, and the landlord shoulders the cost of the insurance, taxes and maintenance.

Absolute NNN leases

Less commonly, there are absolute NNN (or bondable) leases, in which the tenant pays all costs of the building repair, including roofing, for example.

Percentage leases

Finally, there are percentage leases, in which the tenant pays a percentage of retail sales in addition to base rent. These are most common in shopping malls but can be found elsewhere.

Make your commercial lease work for you

Signing a commercial lease is a big moment for a small business owner, but it’s important to take the right steps to secure the space that’s right for you. Seeking expert advice and learning more about the process will enable you to make a sound decision.

Casey Conway and Business News Daily editorial staff contributed to this article. Source interviews were conducted for a previous version of this article.