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If you’re new to commercial leasing, here’s a quick look at how these contracts work and who can help you negotiate one.
Commercial leases are new for many owners of small and medium-sized businesses. In one aspect they’re like residential leases in that you get to use a specific property for a certain time in exchange for rental payments. Beyond this, commercial leases are much more complex and open to negotiation. Here are five basics to help you understand how commercial leases work.
Less regulation than residential leases
Consumer laws that protect holders of residential leases do not apply to commercial leases. The lower degree of regulation makes it necessary to thoroughly vet a prospective landlord, the space, zoning regulations and the lease clauses.
Many business owners hire a commercial real estate attorney to handle their commercial leases because the documents are complex and legal binding. They rely on an experienced attorney to help them understand the terms of the contract, identify clauses and language that might create headaches or financial problems down the road and help negotiate changes.
Commercial leases are negotiable
Everything in a commercial lease is negotiable—from the security deposit and the length of the lease to late fees and an option to purchase.
If a space has been vacant for a long time, you may be able to negotiate for better terms. Asking what incentives are available could result in valuable perks like rent reduction for a set period or an allowance for moving expenses.
Commercial leases are longer
While most residential leases are for one year, standard commercial lease agreements typically go three to five years—and ten-year leases aren’t uncommon.
Shorter-term leases provide more flexibility. If your business changes and needs more space or closes, you’re not locked in as long. Longer term leases are a bigger commitment, but a landlord might be willing to negotiate more favorable terms knowing the space will generate income long-term.
Commercial tenants typically pay for more than rent
Every commercial lease is different and its crucial to know what expenses come out of your pocket and which come out of the landlord’s. Find out who’s responsible for insurance, maintenance of leased and common areas and repairs. In some cases, property taxes are paid by the lessee. Ask about parking too.
Before entering into a commercial lease, become familiar with the terms gross lease and net lease.
With a gross lease, the landlord covers insurance, property taxes and maintenance.
A net lease means the tenant pays certain expenses and there are four classifications: N, NN, NNN and Absolute Net lease. Here’s what tenants pay for with each in addition to rent:
N: tenant pays property taxes
NN: tenant pays property taxes and insurance
NNN: pays for property taxes, insurance and operating expenses
Absolute net lease: taxes, insurance, operating expenses and repairs to elements like roofs, parking lots and lighting
Commercial real estate brokers help locate property and facilitate deals
Commercial real estate brokers facilitate sales of real estate as well as leases of commercial spaces. These licensed professionals work for landlords, tenants and sometimes as a dual agent. However, it’s best for each party to have their own broker looking out for their respective interests.
Brokers earn a commission based on the value of the lease and the cost is split between the landlord and tenant, unless a different payment arrangement is negotiated.
Keeping the rent paid
Commercial leases are legally binding agreements, and monthly payments must be paid on time. Fluctuations in cash flow sometimes make it more difficult pay the rent, however, a business line of credit can bridge the gap so you can stay current with your lease and focused on your business.
All loans subject to approval. Rates, terms, and conditions are subject to change may vary based on credit worthiness, qualifications, and collateral conditions.
Consumers business loans
Do you have business banking questions? Contact our knowledgeable commercial loan officers.