To Lease a Commercial Property

A lease is a contract conferring a right on one person (called a tenant or lessee) to possess property belonging to another person (called a landlord or lessor) to the exclusion of the owner landlord. Although leasing commercial real estate may appear simplistic, perhaps even one-dimensional, it is crucial to take 7 essential steps. Otherwise, the process can turn into disarray.

  1. Define your requirements

    The first questions to tackle are as follow: "What am I looking for?" and "What would suit me best?" From prerequisites such as deciding location to determining the property's prospective use, evaluating the space is critical.

    A "Project Team" - a tenant, an architectural planner, attorney, and a CRE broker - primarily evaluate the lessee's objectives. When searching for commercial property, one may assess a space's

    • efficiency size
    • prospective use areas
    • potential modifications

    Though a lessee may have only a few decisive requests and/or expectations, a broad idea about one's future real estate property is vital. A lessee should, before initiating a CRE search, determine his/her square footage requirements. Once the "Define your Requirements" element has been satisfied, an additional architectural summary of requirements can be created.

  2. Locate suitable property

    After determining space requirements, a hands-on search begins. Locate suitable properties, survey the market, and narrow down the CRE contestants.

    Locating the perfect space to lease can be tricky. Luckily, commercial space listings can be found right at your fingertips. When beginning the search, keep in mind the utility of CRE broker, especially when dealing with a market assessment. A market assessment presents various space alternatives, comparing/contrasting a lessee's options. Alongside evaluating specific properties, one should keep track of general market trends. Economic conditions can influence a lessee's decisions to endow in a specific property. Once the essential information has been gathered, and appropriate space has been found, one is ready for a physical tour.

  3. Tour properties

    A property review and physical tour is the next step of commercial leasing. Since an expected lessee engages in numerous visits and tours, it would be beneficial to take notes on each property.

  4. Make a proposal to lease

    The proposal process consists of five elements: preparing a RFP (request for proposal), issuing the RFP to suitable properties, reviewing the landlords' responses, evaluating offers, and perhaps preparing a Comparative Lease Analysis.

    A Request For Proposal is ultimately a collection of requests/desires that a lessee might have. Skimming through all-inclusive samples of an RFP can be exceedingly beneficial - it may trigger new demands or bring to light those which the lessee has accidentally omitted. Devoting careful attention to an RFP is highly suggested since, once presented, it becomes the foundation of a lease agreement.

    An RFP reflects chief negotiations and terms. Therefore, from this document arise the most important elements and factors needed to pave way to an agreement. If either the lessee or lessor excludes specific guidelines, the negotiation process will be tilted towards the other individual. To minimize confusion, one should pay close attention to small details and specifically communicate that a RFP is not legally binding.

    After the owner has responded to your initial proposal, it is time to analyze all the major points of the response. If you have made more than one proposal there are certain elements that need to be compared. These items might include: Rent rate calculated on the basis of rentable square feet and the rental rate calculated on the basis of useable square feet. This is arrived at by subtracting the load factor from the rentable square footage. Compare the effective rent, which is nothing more than averaging all the years of the rent and factoring in any free rent periods. This is important because your responses may use different rent structures. By reducing this to the average rent per year, per foot, you can easily see which proposal has the better economics. Different properties have differing operating expense histories and it is a good idea to ask for a 3-year history of the operating expenses. Well run buildings have very stable operating expense histories and unless there's been a spike in energy costs, janitorial contract re-negotiations, an insurance crisis, or snow removal, the expenses should be fairly even. Next you will want to compare:

    • Tenant improvements offered by the owner
    • The cost of any improvements you are required to provide
    • Length of term, options to expand, extend or to cancel
    • Timing to delivery
    • Overall suitability
  5. Space planning and architectural evaluation
  6. Negotiate the lease contract

    Negotiating may be tedious and frustrating. It is important to meticulously examine every aspect of the deal to avoid future problems. A checklist, legal involvement, and realization of tenant's resources are discussed thoroughly in this category.

    Various types of leases exist. Prior to negotiating terms of a lease, outline thoroughly provisions that would promote your business. Before entering into a binding contract, decide the duration:

    A short term lease yields flexibility and more leeway to change your demands after a given period. Though long term leases are less supple, they provide stability. The negotiating process will take seemingly perpetual give-and-take, but settling for wary provisions is foolish. While the list is boundless, beware of the following stipulations:

    • Assignment Clauses
    • Personal Lease Guarantees
    • CPI-Based Rent Increases
    • Permitted Use Clause
    • Limitation on Improvements, and
    • Relocation Clause

    Although a lessee analyzes the provisions listed by the owner, he orshe may want to insist on additional terms such as exclusion clauses, security terms, space boundaries, etc.

  7. Close the transaction. The mutual execution of a lease.

Whether you are a landlord or tenant, contact Mark today and he will help you the whole way through a lease transaction to best fit your needs.

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