Commercial Real Estate Leasing: Know Before You Sign

Commercial Real Estate Leasing: Know Before You Sign

As any commercial real estate realtor or broker can tell you, leasing a commercial space is complicated. The leases are long and full of tiny clauses meant to give the landlord as much of your hard-earned dollar as possible. If you don’t speak lease, you’re likely to hit a series of road bumps as you evaluate what your potential landlord has put in front of you. Most commercial real estate leases are 70 pages and more – which means that there’s bound to be a few things in there that you don’t expect. Before you sign on the dotted line, make sure you know what you’re signing – and what your lease could mean for you and your company. Remember that your landlord isn’t out to save you money; they’re out to make money for themselves. Commercial real estate leases are specifically designed to trip the tenants up.

Where to begin? Let’s talk about how your lease is constructed. In the average office lease, the tenant is required to pay base rent, as well as electricity, plus increases in costs that come courtesy of improvements to the common area or other shared space maintenance. Make sure you know whether the lease you are signing is a pure gross lease or not. Pure gross lease rent rates tend to be higher, that is, the landlord might charge more per square foot – but they also mean that the landlord agrees to pay all expenses generally associated with ownership – which could end up being a better deal for you in the end. Make sure you find out how your rent is being calculated – and what kind of lease you’re looking at.

Another thing to consider when leasing space is that landlords operate via the rentable/usable method. That is, they calculate a tenant’s rent by determining the amount of space the tenant is using in their specific suite (i.e., rentable space), and then adding a percentage of the common areas in the building (i.e., usable space). In most leases, the rent is based upon the usable space or usable square footage, which tends to run from 12-14%. Confused? Wondering what this has to do with you? A client of mine from Denver, Colorado and I were looking at the headcount versus the square footage to be leased, and something seemed off. We knew the size was way too big, so as part of the request for proposal we asked the landlord to provide the rentable/usable figure in the building. The figure came back at 25%! That is, my client was going to be paying for 15% of space that was nonexistent.

Once you’ve gained a clear understanding of all the costs associated with a lease, business risk should be high on your list of action items to consider. You need to understand that what you’re signing could have a great effect on your business – what you do and don’t pay for is important! For example, I once reviewed a lease for a prospective client who was looking an industrial setting. Generally, in these types of leases, it is written into the lease that the tenant pays for most, if not all of the improvements to both their space and the building. In this specific case, the landlord had also written a clause into the lease that stated that they had the right to, at any time, relocate the tenant to another space in any of their other properties – without reimbursing the tenant for improvements or moving costs! That is, the landlord could tell the tenant, “You move in 2 weeks to X building. It’s required, and we’re not going to pay a dime to help you get there.” Imagine if you hadn’t budgeted for this kind of expense! It could be devastating to your business. Not to mention that such a clause meant that the landlord could move the tenant from a great, stable, well-run building to a rundown building in their portfolio or even a building in another city!

Bottom line? You’ve got to read your lease – every single word of it. Your landlord will try to work in extra clauses, and if you’re not keeping your eye out for them, you can get screwed. Another example of these extraneous, dangerous clauses? These days, many leases have a clause that allows the landlord to sue the tenant at any time – for anything – while recouping their legal fees from the tenant. I once had a tenant who didn’t want to renew her lease because her landlord had let the building fall into disrepair. The landlord sued her for not renewing and took her to court. While he didn’t ultimately win the court case, it was the tenant who was responsible for paying all the legal fees. A huge waste of time and a huge waste of money!

As you can see, it’s extremely important that as a tenant, you’re well informed and that you understand all the costs associated with your potential new location and your new lease. There are business risks involved with signing a new lease, and if you’re not careful to read through your entire lease before you sign on the dotted line, you could be sorry later.

About the Author

Lynn Drake’s status is well known in the industry: She’s the commercial realtor focused on maintaining “true north” for her corporate clients. It’s a reputation built on 35 years of commercial real estate experience. Lynn became a commercial realtor in 2001 after 15 years in corporate real estate. Thus far in her career, Lynn has successfully completed over 1,500 real estate transactions ranging from small business tenant leases to the sale and purchase of industrial complexes.