Knowing how to lease commercial real estate and ensuring that you get a good deal are often two different things. There are many factors to consider when you’re signing a rental agreement for commercial space if you want favorable terms.
There are three main forms of commercial leases including full-service leases, net leases, and modified gross leases. The process of identifying, negotiating, and signing a commercial lease is a long one. It’s also a process that can make or break a business so it’s important to go through it correctly.
This article will cover a lot of things you need to know before you sign a commercial lease. It’s important to understand the information in this article so you can help your cause when leasing space.
The first step in finding a commercial real estate space for your business is considering the needs of your business. There are many types of commercial space for lease so you need to consider location, property type, zoning, size, budget, accessibility, and more. You will also need to consider how the property you lease will affect your customers and employees.
Location matters in when leasing commercial real estate
Location is known as being the most important factor when leasing commercial real estate.
When you’re leasing office or warehouse space it becomes much more important to consider how the location will affect your employees. You don’t want your location to negatively impact the lives of your employees because it will negatively your business.
Accessibility is key
Accessibility is key in any commercial lease. Your customers and employees shouldn’t be expected to navigate a maze to get to your business because that will affect your bottom line. You also need to have plenty of parking.
Commercial Property Zoning
All commercial real estate has local commercial property zoning requirements. For example, a warehouse is a commercial property zoned for industrial use. Zoning ordinances are important because they dictate the type of business that you can operate out of the building.
It’s important to make sure that you understand the local zoning laws. You also need to know the type of zoning your business needs.
You can check with the local chamber of commerce or Google the local zoning regulations. A local commercial real estate agent can also help you figure out the zoning requirements of the buildings in the area.
Commercial real estate lease
The size and layout of the space that you need will determine the commercial lease options that are available to you. The amount of space that you need will also have a lot to do with how many customers or employees you need to accommodate.
Office spaces tend to require between 200-300 square feet of useable space per employee.
So if you’re looking to lease space it is a good idea to think about how many people you expect to use the space.
It’s also a great idea to determine how much rent budget you’re working with ahead of time. This will help you narrow your search to spaces you can afford. The maximum rent budget should depend on how much business you expect to do.
Knowing how much square feet you need will help figure out the maximum you want to spend rent. There are a few online tools that can help you determine the average price per square foot in your local area. A commercial real estate agent can also help you find the average price per square foot as well.
Once you know how much space you need and the average per square foot in your area then you can match that with your rent budget.
Keep in mind that you will also need to factor in utilities and common area maintenance (CAM) fees. These expenses should be part of your max budget calculations. Expect to spend about $2.00 per square foot on utilities. You should also expect CAM fees to cost between 15-35% of your annual lease payment.
You may also need to factor in some build-outs cost depending on the type of business you’re running. Annual rent increases are another factor to consider. It is possible to get the landlord to cover some of these costs, but you should be mindful of them. Lease payments tend to increase by about 3% on average.
You should make sure that your maximum rent budget is no more than 8-10% of your expected annual gross income. This will help you avoid putting your business in a bad spot.
Find a Commercial Real Estate Broker
Most commercial real estate leases are handled by brokers. This is due to the complexity of commercial lease agreements and the amount of money involved.
There are two types of commercial real estate brokers. There are commercial leasing agents that work for the landlord and tenant representation brokers.
Listing agents are hired to market the property and represent the needs of the landlord. The tenant reps are tasked with helping tenants get the best deal possible. Landlords typically pay 3-6% of the total lease amount to the commercial real estate agents. In most cases, the fees are split evenly between the agents.
Make sure to read this article to learn more about WHAT IS TENANT REPRESENTATION AND WHY YOU NEED IT.
Understand the Different Types of Commercial Leases
There are typically 3 types of commercial leases. The major difference between them is the way costs and fees are assessed.
The three types of commercial leases are:
A full-service lease is the most common type of commercial lease for office buildings. The rent is all-inclusive with a full-service lease so the landlord is responsible for paying property expenses. Therefore, the landlord pays all the property taxes, insurance, repairs, and maintenance. They also pay the utilities and janitorial services. This is the best type of lease for the tenant because it helps the tenant avoid hidden or unexpected costs.
A net lease is a lease agreement where the landlord charges a lower annual rent compared to a full-service lease. However, a landlord can pass on other costs directly to the tenant. In this scenario, the tenant can be responsible for taxes, insurance, and CAMS. Net leases can be either a single, double, or triple net lease.
A single net lease means a tenant pays rent and a share of the building’s property taxes. In a double net lease, the tenant pays also pays a portion of the property insurance. The tenant pays a portion of the property taxes, insurance, and CAMS in a triple net lease.
These type of lease agreements provide a lower base rent for the tenant. However, the tenant is also responsible for the monthly cost associated with maintaining the property. These types of leases are the most landlord-friendly.
Modified gross lease
A modified gross lease is a compromise between the full-service and net lease options. With a modified lease, a tenant might pay for a portion of the additional expenses. However, it’s typically a lump sum payment along with the rent. The modified lease means there are no hidden or unexpected costs. The rent and lump sum payment stay the same no matter what extra costs come up.
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