Sunday, September 19, 2010

Searching for and Leasing Office, Retail, or Industrial Property

A brief guide on how to get started searching for your perfect commercial space.

Starting Out
Begin by defining your needs for your new space: how much are you willing to pay monthly for rent, how much are you willing to pay to build out your space, minimum and maximum square footage, parking requirements, amount of foot traffic/accessibility, signage, specific use type (for instance restaurant or medical office), and type of building (e.g. multi-tenant, single tenant building). Once you've defined your needs you can begin your search.

Should I Use an Agent?

To answer this question we need to understand how a commercial leasing agent is compensated. Typically the agent representing the landlord and the agent representing the tenant are paid a percentage of the lease value by the landlord after the lease is signed. For instance, if the tenant signs a 3 year lease with a rental rate of $1,500 a month, the landlord might pay a total commission of $5,400, which is 5% of the total lease value of $108,000 (3 years x 12 months x $1,500). The $5,400 is then split amongst the landlord's agent and the tenant's agent (usually a 50%/50% split). There are also occasions where the landlord will refuse to pay a commission to an agent. If this happens, you may want to consider paying the commission yourself.

Now that we know how an agent is compensated we can better determine whether or not to use one when leasing a property. For short-term leases (1 year or less) or for small office or retail spaces an agent might not be willing to work with you, because the commission amount will be low. If there is enough potential commission, you should seriously consider using the services of a leasing agent. Not only do they have a better idea of what the current rental rates are for the area, but they can be an invaluable source of information when negotiating the lease.

Short answer: Yes, you should work with an agent if they're willing/able to work with you.

Where to Look

Driving around your desired area and looking for "for lease" signs is a great first step. When contacting landlords and property managers, ask if they have other similar properties and if they have any scheduled vacancies. There are several online sources for commercial real estate listings, but and seem to be the most popular. Loopnet is probably the best place to start your search and to get a good idea of what's available.  You'll also want to look in the classified sections of your local newspapers, but the most up-to-date information is usually found online.

Viewing Spaces

Arrange to tour spaces that fit your criteria by scheduling with the landlord/property manager or the leasing agent. Bring a notepad to write down any information supplied during the tour and bring a camera to take photos to help you remember each space.
Some things to consider and ask about when viewing spaces:
  • Will the city allow my hair salon/doctor's office/Italian restaurant to operate in this space?
  • Date of space availability
  • Construction costs to prepare the space
  • Parking, ease of access, safety issues
  • Space visibility and signage opportunities
  • Ask about outside interest in the space. You probably won't get an honest answer, but it's worth asking about.
  • Any restrictions business type, operating hours, advertising/signage
  • Accessibility for the handicapped
You've Chosen A Space
If you've decided on your space, it's a good idea to send the landlord/property manager a non-binding letter of intent (LOI). The goal of the LOI is begin negotiations for the space by clarifying the major deal points, which will make the lease easier to prepare. The letter can be as simple or detailed as you want it to be. For instance, here's a very simple version:

Dear Mr. Property Owner,

This is a non-binding letter of intent. I'd like to lease your 1,200 sq ft space at 900 A Street in Los Angeles, CA for $1,200 a month. I'd like a five year lease and four months of no rent (rent abatement) for the build out of my clothing store. If these terms are acceptable to you, please sign below and prepare a lease draft based on these terms.


Clothing Store Owner

If you have an agent, he or she will help you prepare a letter of intent that covers all the important deal points. If not, here are a couple of sample letters that you can use as guides:

Don't forget that the LOI should be:
  • Non-binding - You or the landlord/property manager could walk away from negotiations at any time. Make sure that the term "non-binding" is included somewhere in your letter.
  • A starting point for negotiations - Don't be afraid to start by asking for more than you want (e.g. lower rent, more months of rent abatement), so you can give up some of your terms and make the landlord/property manager feel like they've accomplished something in the negotiation. Try not to be too greedy though, because the landlord/property property manager may not respond if they think both sides are too far apart from the beginning.

In some cases you may be asked to complete a rental application before the landlord/property manager will begin negotiations. From the landlord's perspective this makes sense, because he or she doesn't want to waste time negotiating with someone who doesn't have the finances or required experience to successfully launch a business from the location. At the same time, you don't want to waste your money on an application fee or your time preparing the application if the landlord is unwilling to meet your terms. You're better off insisting that a letter of intent be finalized first and reminding the landlord/property manager that he or she can walk away if the application falls short of the requirements. It's also a good idea to find out ahead of time what the landlord application requirements are for the space (e.g. asset, credit, experience requirements). If you can't meet the requirements, let the landlord know and see if an exception can be made before working on the application. Make sure that the landlord/property manager only considers one application at a time before paying a fee and ask to see if the application fee can be applied to the first month's rent.

Negotiating the Lease
Too many tenants without representation sign landlord lease agreements without questioning any lease provisions. Please commit this to memory: NEGOTIATE EVERYTHING. There may be standard forms with standard amendments, but you can (and should) make changes to them. If you don't have an agent representing your interests, you should consider having an attorney review the lease drafts and make adjustments.

A few items to consider when negotiating a lease:
  • Cap triple net expenses (if you have a net lease) and rental increases, so that they don't increase more than a certain percentage each year.
  • Ask for options instead of a long-term lease. Expect to pay more during the option period.
  • Try not to a have a personal guaranty. Expect to put down a larger security deposit if the landlord allows this.
  • Why negotiate a short-term lease: Your space is not unique and is easily replaceable, like an office space. You're opening a new business and aren't sure if you're going to succeed.
  • Why negotiate a long-term lease: Your space is unique and not easily replaceable, like a restaurant space in a busy downtown area. You're able to lock-in a low rental rate during a poor economy.
  • If you're looking a long-term lease, ask for credits for tenant improvements (TIs). If you're going to be putting in $50,000 worth of construction improvements to the space, you should be compensated by the landlord for some if not all of what you put in.
  • Ask for a period of rent abatement (a period where no rent is paid). With a longer term lease, you're more likely to get some rent abatement.
  • Specify the exact location of each sign for your business. Make sure you understand any limitations that the landlord places on signage, like sign size or type.
  • A gross lease where you pay a flat rental fee is preferable to a net lease where you may pay the landlord's taxes, insurance, and common area maintenance charges. As mentioned before try to cap the triple net expenses if you have that type of lease.
  • Understand exactly what space you're renting. For instance, is the patio in front of your restaurant included?
  • Make sure you can terminate the lease if your use is unacceptable with the city. Cities aren't always transparent, so you may find out after signing the lease that the city will not allow your use.
  • Make sure you have the ability to sublease or assign your space if you need to leave for any reason.
  • Who will pay to make your space ADA (Americans with Disabilities Act) compliant? This can be very expensive depending on the age of the building and its use.
  • What equipment will you be responsible for maintaining? Check the condition of these items, because the last thing you want to pay for is a new $5,000 AC unit in the first few months of your lease. If you're going to be responsible for equipment, such as an AC or water heater, make sure the landlord pays for its maintenance for at least the first 18 months of the lease.
  • Consider asking about an exclusivity clause which will prevent the landlord from renting another space within the building or shopping center to a tenant with the same business use.
  • If the landlord/property manager makes any promises regarding repairs, make sure that they're written into the lease.
This is not meant to be an exhaustive guide and is simply an overview of the commercial leasing process.

Here are a few websites with other helpful hints: