How can you secure favorable terms for your commercial lease agreement?
You need to be prepared. You need to know where your boundaries are. And, you need to be willing to meet the needs and requests of your best tenants.
It helps to seek assistance and support from a Southern California commercial property management partner as well. Whether you own a retail space, an office building, or something more industrial, your lease agreement is an important part of protecting your investment and your financial interests.
Commercial tenants will come to your lease negotiations with certain expectations. You’ll also have an idea of what you want to be responsible for and what you expect your tenants to do. A good commercial lease is specific and detailed, and it doesn’t leave much to the imagination. You want to document everything.
Remember that all of your lease terms are negotiable. You and your new tenants may come to some decisions about taking specifics out of the lease or adding new things into the lease. As long as you’re feeling protected by what’s decided, almost everything is on the table. You can debate lease terms, you can discuss shared building responsibilities, and you can talk about the modifications you’re willing (or unwilling) to make during the build-out process.
At Bell Properties, we work with commercial property owners all the time to ensure they’re executing lease agreements that protect their interests. Here are some of our best tips.
Lease Terms. How Long Do You Want to Keep Your Tenants?
Bell Properties has seen commercial lease agreements for two years, five years, and even 10 or 20 years. It really depends on your space, your own investment goals, and the type of commitment your potential tenants are willing to make to your space.
Most commercial lease agreements begin with a proposed length and then offer extension options and escalations. Ideally, you’ll find tenants who are willing to sign a longer lease. The longer lease will allow you to do some long term financial planning. Your longer lease will also save you money on marketing for new tenants, turnover costs, and vacancy.
Still, you want to stay loose and flexible. Your tenants may want a shorter lease term if this is a new business for them.
The length of the lease you ultimately sign will also depend on whether your tenants are investing their own resources to make renovations to the space they’re renting. If a tenant in your commercial space has plans to do some renovations and wants to amortize the investment they’re making, it’s important that you include specifics about what is permitted. You might require that all permanent fixtures stay at the property even after the lease has expired, for example. This protects you against default or early lease terminations.
Negotiating Tenant Improvements to Southern California Commercial Properties
You can offer your commercial property “as is” and find a tenant who is willing to take it. It’s unlikely that you’ll find a commercial tenant who believes your property is move-in ready, however. One of the biggest parts of your lease negotiation will cover improvements and renovations. Who is making them? Who is paying for them?
Every tenant is unique, and so is their business. One of your tenants might be opening a new retail shop and they’ll want better lighting and huge mirrors in dressing rooms, for example. When tenants want physical renovations and updates, they may ask you for a Tenant Improvement Allowance. This is money you’ll give tenants to pay for improvements to the space. Typically, it will cover:
Different paint colors or wall aesthetics
New flooring
Updated fixtures such as lighting and mirrors.
Walls to divide up larger spaces
Generally, a per-square-foot amount will be offered by an owner, or a flat sum of money that the tenants can use as they see fit.
What if the amount spent by your tenants exceeds the allowance you’ve agreed to? Tenants will likely have to be responsible for those costs, so make sure it’s written into the lease. And remember that you can stipulate that you’ll always have the power to say no to a renovation. You can restrict what is done and require prior approval.
Once you decide how much of an allowance you’ll provide for improvements, you have to negotiate how the work will be completed and by whom. You’ll need a timeline and you’ll want to make sure reputable vendors and contractors are being called in, so the integrity of your building is respected and protected.
Who is Making Repairs and Tending to Maintenance?
Unlike residential lease agreements, commercial leases can put some of the onus on tenants when it comes to maintenance and repairs.
This is your building, so you have an interest in keeping it maintained and in protecting its condition and value. But, your commercial tenants are running businesses from the spaces you rent them, and they will have an interest in its maintenance and repairs as well.
Outline who is responsible for which maintenance tasks in your lease agreement. You can negotiate a lease that says the tenant is responsible for all systems in the commercial unit, including air conditioning and heating and plumbing. Tenants may agree to this but also ask for a dollar limit on what they’re required to pay for maintenance and repairs.
Leaving your tenants in charge of paying for maintenance and repairs is a great way for you to save money. But you also have to think about the long term condition of your investment. Those tenants are going to vacate the property at some point - maybe in a year and maybe in 10 years. What if they don’t maintain the property to your standards? You could be left with a lot of deferred maintenance and a lot of renovation costs once they’re gone.
You can pay for all maintenance and repairs. This is an option that allows you to keep the property running at your own standards. And, without the burden of maintenance, you can charge higher rents for tenants who don’t want to be bothered with making repairs.
Common area maintenance shows up in a lot of commercial lease agreements as “CAM.” This is money you can collect from your tenants on top of the base rent they pay to occupy your unit. These expenses cover the costs of maintaining common areas. If you have six different companies in an office building, for example, you’ll want to collect a monthly fee from each of them to pay for things such as:
Sidewalks
Landscaping
Snow removal
Elevators
Lobby areas
Explain exactly what the common areas include in your lease.
It’s common practice for commercial owners and tenants to negotiate CAM costs in accordance with the tenant’s square footage. Your tenants who rent 2,000 square feet of space, for example, will have a lower monthly fee than those tenants with 5,000 square feet of space.
If you’d prefer to keep things consistent and collect the same flat fee from all your tenants, you can work this into your lease agreement as well. It’s also important to negotiate an increase. It’s not unreasonable to have the CAM fee increase three percent annually. Tenants may look for a cap on how high these fees can go, so consider the length of the lease agreement when you’re working out what to charge them.
Lease Terminations and Relocation Rights
A lease binds you and your tenants to its terms and time frame. But, unexpected things happen. Your commercial tenants might have an unexpected downturn in their industry or their business. They might have to terminate the lease early.
Protect yourself against the unexpected loss of tenants and rental income with an early termination right, which will allow the tenant to end the lease before the agreed lease term expires, as long as they are willing to provide proper notice and pay any penalties or early termination fees.
Your lease termination fee could be the equivalent of several months of rent or it can be a flat fee that’s likely to cover the expense of finding new commercial tenants.
Another item to negotiate into your commercial lease agreement is the right to relocation. This will only work if you have multiple commercial properties to rent out.
This is an option you’ll have to move a tenant’s business to another space in your shopping center, office building, or other commercial property. Your tenants will likely agree to this being written into the lease if you’re willing to pay for the costs associated with the move. Remodeling the space, however, can be a shared expense or something paid for by the tenants.
While these are general tips on negotiating a lease agreement, we’d be happy to take a look at your specific property and your needs to help you understand what kind of commercial lease agreement will work best for you. Every lease agreement will be written to fit the needs of the owner, the commercial tenant, and the space itself.
At Bell Properties, we’d be happy to serve as your Southern California commercial property management resource. Contact us at Bell Properties Commercial Real Estate today.
