Negotiating the lease for your first commercial space? Here are 3 tips from our seasoned attorneys!
We have the privilege of representing many first-time business owners pursuing a dream. Our clients include dentists opening up their own practice after years working in corporate and even engineers who are tired of the grind and looking to start a new restaurant. One of the most exciting things for a brand new business is identifying the location of the new office, practice, retail front, or restaurant. With that excitement though comes a lot of anxiety, because renting a commercial space is many times both a brand new experience and the very first substantial monetary commitment our clients are making.
Let’s say you see a listing for a commercial space advertising a base rate of rent per square foot for a space within a new retail plaza or office high-rise. You plan your budget accordingly and decide that this space makes sense at this rate, so you reach out to the listing agent only to find out that the base rent is not all you’d be responsible for.
A triple net lease (NNN lease) is an extremely common type of commercial real estate lease agreement where the tenant agrees to pay all property expenses in addition to the base rent. This usually includes a proportionate share of the annual property taxes, insurance for the building itself, and maintenance and repair costs. Landlords use them because it reduces their financial burden and shifts responsibility for major expenses onto the tenant(s). On the other hand, tenants are exposed to variable costs which can blow their budget (taxes and insurance premiums can vary wildly year to year, as we’ve seen in Florida).
It's easy to focus on the initial advertised base rent per square foot, but when creating your initial budget, you have to be mindful of the additional common area maintenance (“CAM”) costs as well, because those can be both substantial and variable.
Commercial leases are long and detailed. Once you reach an agreement on terms, the landlord will usually direct their attorneys to prepare the lease, which can take a couple of weeks and likely a few thousand dollars in legal fees. You can imagine, then, that the landlord does not want to go down this road unless they know you are a serious candidate for renting the space. That is typically why a landlord or its broker or agent will require that a Letter of Intent (“LOI”) be signed prior to the lease itself being drafted.
The “LOI” is typically a non-binding agreement whereby you, as the tenant, will agree to sign a lease with the landlord under the skeletal terms specified. Often, the LOI will list out the base rent, the starting monthly CAM rate, lease term, renewal terms, and other details you’ve negotiated to this point.
We always recommend that our clients get us involved prior to signing the LOI for a variety of reasons. First and foremost, if we don’t ask for certain things now, it is much harder to negotiate after the landlord has already paid their attorney to draft the lease under terms that are more favorable to their client. For example, we try and negotiate to lower the security deposit, limit any prepaid rent, limit increases on CAM year-to-year, etc. In our experience, we get far better results negotiating these with the agents at the LOI stage prior to a lease being drafted. If you wait until after, the response will usually be the same: “This was not negotiated for on your Letter of Intent.”
We find that many of our clients look to negotiate the leases for their very first spaces themselves. We understand the temptation because many of our clients have been very driven and successful in their field, and they are often very intelligent and capable. But what they might not have is experience in this particular endeavor.
A broker or agent who specializes in negotiating commercial leases for tenants can be invaluable as they can offer you market insights and negotiate terms that you could not have anticipated as being either negotiable or relevant. The best part is that they are usually paid a percentage by the landlord, so you aren’t out of pocket for their time.
In this same vein, we also have clients who tell us they’re having their friend that’s a real estate agent negotiate on their behalf. We are often surprised to find that their friend exclusively does residential real estate sales. Not all agents are the same, and while there are plenty of great residential agents who could also dabble on the commercial side, this is an industry based often on connections and insider knowledge. If you’re going to work with an agent anyway, you might as well work with one that is experienced in the field.
Don’t be fooled into signing a 90-page lease you don’t understand thinking it’s just standard legal boilerplate. It’s not!
Commercial leases are unlike residential leases in many ways, but the good thing is that they are actually more negotiable than residential leases. Don’t be fooled into signing a 90-page lease you don’t understand thinking it’s just standard legal boilerplate. It’s not! We’ve negotiated hundreds of leases over the past 10 years for all sorts of businesses. Whether you’re opening the restaurant you’ve always dreamed of or expanding your mental health therapist office, getting our office involved will protect your interests and your money.
