Negotiating a commercial lease is an entirely different ballgame from a traditional residential lease. Many real estate professionals from the residential side of the business view commercial documents as a different language. Alongside major differences in verbiage come different negotiation tactics that are considered the norm in commercial leasing. Unique negotiation factors, such as revenue from the business renting the commercial unit and property taxes of the building, are oftentimes talking points when discussing the terms of the lease.
If navigating a commercial lease in 2023 feels like uncharted territory, here are several things to expect during the negotiation.
Triple Net Fees
When negotiating a commercial lease in 2023, expect to discuss ‘triple net’ out of the gate. Property taxes in many areas around the country are continuing to rise. This is putting tremendous pressure on landlords and investment companies to raise rents and other fees. Don’t be surprised to see a landlord forced into selling a commercial building because of the increased costs of ownership. For property owners considering this route, this resource outlines how to sell a commercial property. However, not every landlord will sell when the pressure is high.
To combat increased real estate costs, triple net leases for a commercial property typically include property taxes. If the property taxes increase year-over-year, the triple net fee likely will too. Triple net leases can also include utilities, maintenance of the building, insurance, and other fees.
Here is where the negotiation comes into play. You can attempt to negotiate the total amount that you would pay for the triple net portion of the lease. In commercial real estate, it’s common to see this figure based on a dollar amount multiplied by the square footage of the unit. If the actual dollar amount of the triple net lease isn’t negotiable, you can attempt to negotiate what it covers. Your business may not need weekly trash removal or other maintenance services within the unit. Use any leverage you can when negotiating a formal commercial lease in 2023.
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Build Outs and Renovations
If you’re feverously hunting for a commercial space to rent, you likely came across units that are complete build-outs. They don’t have any rooms, bathrooms, waiting areas, or other features. The unit requires a large renovation to bring it up to speed and make it ‘move-in-ready’. Depending on your needs and timeline, this may scare you away, as it does with many prospective commercial tenants.
Owners of these commercial units expect to negotiate with tenants on what they want to do with the unit. Certain landlords will offer to pay for the entire renovation if a long-term lease is signed. Other landlords want the tenants to pay for the entire renovation. However, most negotiations meet somewhere in the middle. Obviously, renovating an entire unit is a huge expense. However, when renovating it yourself, you can take the creative reigns when revamping the unit. It’s also important to negotiate what is allowed – or not – with your renovation plans.
You’ll be hard-pressed to find a commercial lease that is under 12 months. While they may exist, they are extremely rare. Many commercial landlords and property managers require multi-year terms when bringing on a new tenant. This is where the negotiation kicks off.
If they prefer a long-term tenant, you can use that as leverage when negotiating the rent and other fees included in your commercial lease. For example, you can offer to sign a 5-year lease but have the rent lowered for the first 3 years of the lease. Nearly everything is negotiable in a commercial lease. Don’t be afraid to ask for what you want in a considerate manner. Also, make sure to consider how competitive the commercial space is. If there are tons of other applicants, tread lightly when asking for the moon.
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