What to look out for as you negotiate a commercial real estate lease
The process of negotiating a commercial lease can be extensive and exhausting, with several hazards to avoid. But a prospective tenant who has a basic understanding of the agreement and what they want in their lease has a great deal of leverage. It’s important to remember that when it comes to finalizing a CRE lease, everything is negotiable.
1. Detailed expenses
Landlords typically look to pass on expenses to their tenants. In a triple net (NNN) lease, the landlord will bill separately for taxes, insurance, or common area maintenance (CAM). A prospective tenant should pay special attention to which expenses your landlord expects you to be responsible for, especially as part of CAM. Since CAM is broadly defined, a landlord can include virtually any operating expense within this line item.
While negotiating a lease, you reserve the right to review the expense budget yourself, as well as which costs are incurred. Even if the rent is right, you can run yourself out of a good deal by failing to include exactly what you are responsible for paying within the lease during negotiations.
2. Set cost parameters
Negotiate and establish a cap on the periodic percentage increase in order to avoid unmanageable rent increases. This should be one of the first things you discuss with the landlord.
3. Require an exclusive use clause
The exclusive use clause should include detail about the types of services your business will be providing or the types of products you might sell. From a tenant standpoint, the exclusive use clause should restrict the landlord from leasing any common or connected space to potential competitors. For example, if you are going to own a bakery in a shopping center, you want to prohibit your landlord from leasing other space in the shopping center to another bakery or like-minded business.
4. Determine responsibility for maintenance and repair
Typically, landlords will try to hold their tenants responsible for maintenance and repairs for any issues other than the roof, exterior walls, or parking lots. With this responsibility, a prospective tenant could end up having to replace old equipment such as the plumbing or air conditioning systems, which can be pretty costly. If the building is relatively old, you might want to consider getting the HVAC systems, plumbing, and electrical equipment inspected. If you find problems, it will provide leverage during negotiations. Do your due diligence, or find out the hard way.
5. Remember the little things
If it’s not in writing, it didn’t happen. That’s why it is imperative that every detail negotiated is clearly explained. If a business needs signage, be sure the lease agreement doesn’t prohibit the use of signs that are visible from the street. The lease should also include assurance that expenses won’t increase within the first 12 months of occupancy. Additionally, there should be a discussion on subletting options. The tenant will only be able to find someone else to cover his or her rent, if needed, if an assignment or sublet clause is in place.
Even if you are a strong negotiator, you won’t want to go through negotiating a commercial real estate lease alone. A good broker is essential, as they will have the experience in the area to know what landlords have been offering and how they may try to negotiate with tenants.
For over three decades, South Florida businesses and investors have known Morris Southeast Group for its market knowledge, valuable insight, expertise, and resources to guide clients through the real estate decision-making process. To learn how we can help you find a commercial real estate lease you can feel safe with, contact our team today at 954.474.1776, reach Ken Morris on his cell at 954.240.4400, or email kenmorris@morrissegroup.com for a free consultation.
Tags: commercial real estate lease, CRE lease, tips for a CRE lease, what to know about a CRE lease, what to look out for in a commercial real estate lease
