1. Do a Thorough Review of Your Prospective Tenant Needs. Prior to starting the property search, perform an evaluation of your overall business strategy and needs. Ideally, give yourself at least 9-12 months to complete your review and identify the location of your future lease premises. How much space do you need? Is telecommuting or flex time an option for your employees? How important is location? Do you need to be close to your customers? Where are your employees located? Do they need mass transit access? Is parking a major issue? Is visibility (from major roadways) important to the success of your business? What about signage? Are you willing to execute a long-term lease? Do you need a termination right? How quickly is your business growing? Do you need an expansion strategy? Do you need use restrictions on the non-leased premises at the property to be successful?
2. Engage a Commercial Real Estate Broker. A good commercial real estate broker or representative can usually help tenants evaluate business needs and most importantly understand current market terms based on comparable deals. This can save a prospective tenant potentially significant amounts of money, particularly given real estate is usually the second largest line-item on a company’s income statement. Make sure the broker you select is familiar with your industry and market. If you think representing yourself will save you money, think again. Almost always landlords will pay an industry standard commission to be shared by both the landlord’s and tenant’s representative, whether there are two brokers or not. Don’t think for a second that the landlord’s rep will look out for your interests. Make sure you sign a written brokerage commission agreement that clearly states how the tenant rep will be compensated.
3. Negotiate a Letter of Intent. Once you identify a prospective location, negotiate a detailed “letter of intent” with the landlord before moving forward to negotiate definitive lease terms. The letter of intent should include all material business terms, including description of leased premises, term, rental rates, security deposit (if any), operating expenses, parking rights, signage rights, description of any required landlord or tenant work to be performed prior to occupancy, any future rights (like right of first refusal or expansion option), and any termination rights. A well negotiated letter of intent can usually save both landlord and tenant significant time and expense because it will let the parties know early on whether a deal is possible or not. The letter of intent is usually signed by both the landlord and tenant and commits the parties to negotiate a written lease in good faith based on the terms of the letter of intent. It would be unusual to see a binding letter of intent, so be careful that binding language is not contained in your letter of intent. Assuming the letter of intent is sufficiently detailed, it can save all parties money on legal fees by keeping lease negotiations focused.
4. Understand the Key Financial Terms of Your Prospective Lease. Before you execute the final letter of intent, make sure you understand how your lease will be structured. Most importantly, make sure you understand what is covered by your rent. Common terms in the commercial real estate industry are “gross” and “net” leases, with net leases being most common. In a gross lease, the tenant pays rent, and all other expenses are generally the responsibility of the landlord. A net lease, depending on the type of property and lease (single net, double net, or triple net), will require the tenant, in addition to rent, to pay for items such as taxes, insurance, maintenance, repairs, utilities, and other items related to operation of the property. In multi-tenant properties (like shopping centers or office buildings), these expenses are almost always “passed through” to the tenants “pro-rata” based on total leased square footage. If you are negotiating a ground lease, in addition to the requirements of the net lease, the ground lease may require you to actually make improvements to the property, including an obligation to re-build in the event of casualty. If you are making significant improvements to the property or the term is lengthy, a Subordination, Non-Disturbance and Attornment Agreement (often referred to as an SNDA) is appropriate to protect your investment.
5. Engage a Commercial Real Estate Attorney. A commercial real estate attorney should be engaged early in the leasing process to assist with items #1 through #4 above, but the real value that a commercial real estate attorney can add will be during lease negotiations. Commercial leases can be complex, and attorneys are trained to evaluate risk and structure the terms of the lease appropriately for the size, scope, use, and term of your lease. I can’t tell you how many times I shake my head as I’m reading through a lease or other legal document at some of the unfair or non-market provisions that make there way into “Standard Form Leases.” A tenant’s negotiating leverage will vary based on the size and type of transaction and marking conditions. For instance, a landlord is going to be more willing to negotiate a 100,000 sf lease than a 5,000 sf lease. Also, depending on the type of lease (ground, in-line space, or office, etc.), the attorney can advise you regarding the appropriate due diligence to perform prior to entering into the lease. The greater the size and complexity of your lease, the more important it is to ask an attorney to review the lease—as would be expected, bigger numbers tend to magnify mistakes in law and business.
6. Understand the Pre-Possession Obligations Under Your Lease. Now that your lease is negotiated, finalized, and executed, you will likely be responsible for some pre-occupancy obligations under the lease. For instance, you may need to pay a security deposit and/or advance rent, deliver insurance certificates, and make improvements to the property. Another common requirement is a “commencement date agreement,” which establishes critical dates that may not be clearly set out in the lease. Your commercial real estate attorney can help you identify these pre-possession obligations and make sure satisfy them appropriately.