Negotiating Commercial Real Estate Leases

Let’s take a quick look at commercial real estate; how a professional broker comes into play and the value they bring to the table for you as a tenant. Commercial Real Estate uses some tricky phrases and terminologies that most businesses are not familiar with unless you deal with this on a day to day basis. You should know as a business owner that commercial real estate can be a big expense to your bottom line and it is critical that you make sure the costs that are involved are reasonable and inline so you can maintain your profit margins.

 

When a tenant is looking to lease a commercial property such as warehouse space or office space, they will inevitably come upon some phrases, let’s look at some. The first one is called “Free Rent” or “Abated Rent”. This can be confusing because some tenants believe that the free rent is totally free meaning their free rent period is equal to zero. With NNN leases, the landlord is always passing through the operating expenses to the tenant. These operating expenses are not nullified during your lease term and they still have to be paid.  Free rent and abated rent will extend a tenant’s lease term; these periods tend to be outside the main lease term and not within the lease term. Example, a 3 yr term with 2 months of abated rent is 38 months, not 36.  What is a fair market negotiation for this type of concession? The answers would fall upon the market knowledge of a professional commercial real estate broker.

 

A tenant will also encounter terms like commencement date or lease execution versus occupancy date. The difference between these terms is when a tenant physically occupies the premises versus when the lease is executed.  Unless this is spelled out differently in the lease, this is how it should be interpreted.

 

Common area is another factor if you are leasing a commercial office space. Landlords can make up what the common areas are, hence allowing them to get more rent than what is truly there. What come into play is the measurements of the space and how they were calculated.  When you as a business owner work with a tenant representative, you have coverage between them and their fellow brokers. Think about what it is like going into a transaction where you do not have the knowledge base to cover the transaction the best way, how would it turn out for you?

 

A lot of tenants do not understand the usable rent area versus the rentable area of a commercial space. Remember, the landlord is charging you for the rentable area not the usable area. As a example if you are leasing a 2,000 square foot space and there is a strange configuration or a beam in the way that does not allow you to “use” the whole space, you are still paying for the whole 2,000SF.

 

Another key factor where your broker comes in is in negotiating for you tenant improvements. What is reasonable, what will be fair? A broker who is involved in the commercial real estate market every day has a good grasp of this and what it is going to take. Tenants at times make a mistake thinking they can improve a space and in the end they tend to mis-calculate what it is going to take. Also, a lot of tenants do not understand leverage when it comes to lease term versus tenant improvement negotiations.  For retail space the tenant improvements are done differently typically than an office or a warehouse space. For retail it is not uncommon for the tenant to come out of pocket with the improvement dollars first and then get reimbursed from the landlord up to a certain dollar amount. What happens if your contractors go over budget? What happens if your contractors cause major delays and they eat into your lease term. Is it better to use your own contractors or the landlords? All of these questions are pertinent and need to be addressed.

 

 

Mike Jones has over thirty years experience in real estate. He has now turned his attention to assisting small businesses navigate the landscape of commercial real estate. For more helpful tips on the subject, please visit http://www.austin-office.com.

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