COMMERCIAL REAL ESTATE TERMS
Before renting a commercial property for your business, let’s talk about the main components of a commercial lease are their provisions. Commercial leases can get complicated if you’re not sure what clauses should be included to protect yourself and your business. Seek the consultation of a commercial real estate agent to negotiate for your best interests.
Base Lease Rent
Similar to a residential lease where you are charged a flat rate for the occupied square footage, you will see base lease rent for a commercial property. You may also find that there is a small fee for common areas like a lobby, bathroom and hallway. Determine exactly what areas are included into your base rent.
In addition to the base rent, you may also have to pay for your pro-rata share (generally your occupied square footage divided by the total amount of the building’s square footage) of operating expenses like insurance and taxes. You will also see charges for the common area maintenance such as snow removal, landscaping, and elevator maintenance.
Generally, as a tenant you are expected to pay the costs of electricity, gas (if applicable), Internet, water/sewage, and trash for your unit. However if the costs of utilities, taxes, insurance and maintenance will be included, that is called a gross lease. The type of lease will determine the additional costs to the base rent, if any.
The lease term defines the length of time your business is the responsible party. A typical lease term for a commercial lease is a minimum of 3 years but can be up to 10 years. Everything is negotiable in commercial real estate. Consider your business goals, maintenance and potential for growth when considering a comfortable lease term.
If changes are required for your business needs, the tenant is most likely responsible for the expenses. Improvements must be approved by the landlord, preferably in writing. The lease term greatly affects your negotiating power. A landlord is more likely to accommodate tenant improvements for a 5-10 year term over a term of 3 years.
A tenant may have signed a three year term but would like the option to renew the lease, this would be the option to renew for an extended period. The specific details of this Option Period Clause will differ from one commercial lease to another.
The Sublease Clause allows the flexibility for a tenant to elect to share the space with another tenant or sublet the whole space. This can be a nice safety net to avoid and early termination fee if you find you don’t need the business space anymore. Alternatively, subleasing is a great way to increase income if there is dead space in your location that you are not using. Some commercial leases will prohibit subleasing so be sure to read your lease carefully.
It’s important to cover all the bases, so make sure your commercial lease covers all these elements.