The journey towards signing a commercial lease agreement can seem labyrinthine, the intricate nuances often leading businesses into a whirl of confusion. After negotiating leases for over ten years, there are a few questions that are essential questions for every business proprietor to ask before entering commercial lease.
What kind of lease is being offered? Lease types vary. Triple net (NNN) leases require you to assume costs beyond the base rent, while with gross leases, the landlord covers most of the costs. Modified gross leases fall somewhere in the middle. Understanding what costs you'll be responsible for is crucial to creating a realistic budget. With different asset types, the most common used type of lease varies. In Austin, I am seeing a trend of most properties becoming NNN for retail and industrial. Office and Medical leases are generally gross leases, while some may be modified gross and less commonly as NNN.
What is the length and flexibility of the lease? Short-term leases offer more flexibility, but they also mean your landlord can raise the rent more often or will require a higher than the advertised rate. It is safer to assume that the advertised rate is based off of a 5+ year lease term. Long-term leases may lock in a good rate, but could be a hindrance if your business evolves and your space needs change. Having subleasing ability and a broker that can help in this situation is key.
What are the limitations on use and improvements? Regulatory zoning laws might limit you from conducting certain types of business on the property. It's also essential to understand if you or the landlord need to make zoning variances/changes or file change of use with the city for a space. Also you need to know what the limitations are on what the landlord will allow you to do with their building interior and exterior. Signage is also an issue to ask up front based on the city regulations and landlord rules.
What are the operating expenses and CAM (Common Area Maintenance) fees? Operating expenses, such as utilities and maintenance, can add up. Understanding how these are calculated and who covers them is important. Also, ask about CAM fees - these contribute towards maintenance and improvements of shared spaces like lobbies and parking lots. With a NNN lease, you have the right to ask for the expense report of the property and ensure that the expenses are legitimate.
How much parking is available? Ample parking for customers and employees greatly improves the accessibility of your space. Identify if there is ample parking and whether there are fees associated with it. It is usually expressed in spots per 1,000SF of space so you will see 2:1000, which means 2 spaces per 1000SF of leased space.
Who are the neighboring tenants? Neighboring businesses can impact your operation. A popular business next door can drive traffic your way, but a noisy neighbor might be a hindrance. Get a sense of who else occupies the property space.
How responsive is the landlord? A supportive landlord can be a significant bane in navigating unexpected challenges. Inquires about the landlord's reputation for professionalism and responsiveness can offer insights into the relationship you may have.
What is the protocol upon lease termination? Understanding the terms for terminating the lease or transferring it to a new owner in case you sell your business can save significant headaches down the road. Having an attorney to review and adjust this section for your needs will be important for long term success in the event of change.
What is the renovation and repair policy? Renovations might be required to suit your business’s needs, will the landlord contribute? What is the condition of the HVAC, mechanics and plumbing? Have the building inspected during negotiations so you have a good understanding of the work needed and have the opportunity to ask the landlord to participate if that is an option. Will the landlord do any work or will they offer tenant improvement dollars towards the work?
I am also seeing a construction management fee being added to new construction properties for the tenants construction work.
What is the scope for future expansion? Your business might grow, and with that, your spatial requirements too. Is there room within the lease to negotiate larger space or first refusal for vacant space adjoining yours?
Remember, signing a commercial lease is a significant step that can have long-term implications on your business's operational cost and efficiency. Being equipped with these questions will make you better prepared to negotiate a lease that fits your business needs. Consider seeking counsel from both a Broker and an experienced CRE attorney to review the lease agreement and ensure your interests are well represented.
