So you’ve decided to relocate your business or open a business… that’s exciting! I bet you’re wondering what the heck to do next…
Unlike renting an apartment (which we’ve all probably done), most people have zero experience in the world of commercial leasing. It can be VERY complex and requires a little more homework than when searching for the perfect bachelor pad. I’ve seen just about everything when it comes to office and retail leases, so I’m sharing some words of wisdom with you that I tell all my clients when they’re looking for a new space.
- Hire a Broker
They’re free! No, seriously. The best things in life are free – love, peace, happiness, and commercial brokers. Okay, that’s a bit of hyperbole, but one of the most common mistakes I see businesses make is NOT hiring a commercial real estate agent to work FOR them and their best interests. Many people think hiring a commercial broker means spending gobs of money, but in reality property owners pay the commercial real estate agent on both sides of the transaction in almost all cases. So, the question is, who wouldn’t want someone working for them and their business’s interests – especially when it’s F-R-E-E. If it’s free, it’s for me. As when hiring anyone, interview a couple people to find the best fit!
- Investigate I don’t mean hire Magnum PI. I mean open your eyes to the entire building and focus on more than the space you’re considering leasing. Is the parking lot full of weeds, trash and/or potholes? Is the paint on the building peeling off? Do neighboring tenants take care of their space, are they loud, does their use fit the building or does it clash with your business? Leasing a commercial space often means a multi-year commitment, and the last thing a tenant wants to do is sign a lease and immediately regret it because the landlord neglects the premises and/or tenants next door cause issues.
- Know the Numbers
In commercial real estate, lease rates are almost always quoted on an annual per square foot (PSF) basis. For example, $16 PSF NNN (NNN=triple net; more on this below) would be a common lease rate to see. That means the space costs $16 per square foot per year. So, if a tenant leases 1,000 SF, the rent would be $16,000 for the year. Simply divide by 12 to get the monthly rent, which in this case is $1,333.33 per month.
- So What About Those Triple-Nets?
No, that’s not a fancy basketball move. Triple-net is a type of commercial lease rate, most often notated as “NNN”. The other most common lease rate is Full Service. Without boring you to tears, there are some complexities in these very different lease rates. The most important difference is that Full Service is an all-in rate, while NNN means that in addition to the base rent, the tenant has to pay an estimated proportionate share of the building’s operating expenses. In other words, each month the tenant pays an amount and at the end of the year, that amount will be trued-up against the actual expenses. The tenant may then owe more money or be entitled to a refund. The take-away here is that Full Service is more tenant friendly, and NNN is more landlord friendly.
- Make an Offer
So you’ve hired a broker, investigated the premises, know the numbers and lease type – what’s next? In commercial real estate leasing, an LOI (or letter of intent) is most commonly used to make an offer to a property owner. The LOI is non-binding, and simply spells out the specific terms a tenant would agree to in order to lease the space. In most cases, there is room to negotiate the terms with the Landlord. After the LOI is agreed to, the next step is the lease.
- Lease Review
Hire a lawyer and not just any lawyer. As good as commercial brokers are, they are not lawyers, and can’t pretend to play one no matter how much you (or they) may want to. As mentioned, leases are often multi-year, and thousands, hundreds of thousands, or millions of dollars. A lease of any size should be reviewed by a competent business or real estate attorney!
This is just the tip of the iceberg – there are many more aspects to commercial leases. Which is why I urge you to find the right broker for YOU!
And of course, I’m always available to answer any questions you have… you know where to find me. 🙂
No matter what stage of life you’re in, P.J. Morgan Real Estate is here for you. We offer commercial sales, leasing, and property management; residential sales, leasing and property management; business brokerage and real estate auction services. We’re with you for life.