Considerations when leasing commercial property
November 18, 2013
Last month I outlined numerous considerations with regard to purchasing commercial property. However, if you own or operate one of the many businesses or stores that lease space, then this article is for you. Moving to a new location can be very expensive and significantly disruptive to your business. On the other hand, depending on your current rental situation, relocating may also dramatically improve company moral, increase employee productivity and expand your company's overall profitability.
The first step in the leasing process is to identify your needs. An experienced commercial leasing professional can be very helpful here. Before ever showing you a building, a good commercial leasing professional will ask you a series of questions about your needs regarding issues that you may not yet have considered. This will help to make the search for new space as relevant and beneficial as possible. Does your current space project an image that attracts customers and enhances client relations? Is your location convenient and accessible? Could certain physical building amenities such as a larger conference room, greater power, higher ceilings or a dock-high loading area create efficiencies and improve your operations? Do you need better exposure or more visible signage? Is your space efficient or are you paying rent on square footage that is simply being wasted? Do you know the difference between your rentable and usable square footage? How do you determine the amount of space you really need, both now and in the future?
If relocating is warranted, the next step is to determine the appropriate timing. A typical office, industrial or retail tenant in this area would be wise to start their search for new space at least six months before their current lease expires. This will provide the tenant with ample time to tour the market, identify a location, negotiate lease terms and complete necessary tenant improvements while generally not creating too long a lead time to discourage a landlord's interest. A larger tenant of, say, 10,000 square feet, or a tenant with specific improvement needs may benefit from budgeting a longer lead time for his or her search.
The third step is searching the market. You can attempt this on your own, but there are numerous benefits to using the services of a commercial leasing professional. First, many of the best commercial properties never see a real estate sign. A professional who spends every hour of every working day leasing commercial properties may often have knowledge of prime, soon-to-be-available properties that can lease up before ever hitting the market. Second, a commercial leasing professional will equalize the playing field by representing your interests, arming you with market knowledge not otherwise available and uncovering competing options that can make landlords sharpen their pencils. Third, you will have a single point of contact who will save you time, allow you to focus on your primary business and provide you with an objective viewpoint.
The final step (not including the actual move itself) is negotiating the deal. Ideally, a tenant will focus on at least two properties in order to gain some negotiating leverage and so as not to put all their eggs in one basket.
There are typically numerous business points to negotiate, including: defining the "premises" and method of measuring them; specifying the permitted use(s); determining the length of the lease term and any option(s) to extend; agreeing upon the security deposit, initial year base rental amount and the methodology for determining annual rent escalations; allocating the property operating expenses between landlord and tenant; negotiating a first right of refusal providing the right to expand into a contiguous space should it become vacant; proposing an option to purchase; and determining the tenant improvements necessary for occupancy and who will construct and pay for them.
Negotiations can vary dramatically, depending on the state of the economy, the strength of the particular real estate market and the financial circumstances of each individual landlord. In a market with high building vacancy or weak demand, properly represented tenants may obtain beneficial concessions including free rent, greater landlord participation in tenant imporvements, flat rental schedules or capped rental increases, and even items such as covered moving expenses.
If a tenant is represented by an experienced commercial leasing professional, that tenant will gain vital market knowledge that should result, first, in pinpointing a space that will help improve company moral, productivity and business success, and second, in securing that space upon the most beneficial terms that current market conditions will allow.
Sperry Van Ness – Highland Commercial specializes in the leasing and sale of commercial properties, and they specifically track the Western Nevada County market. The company's quarterly "Commercial Property Review" newsletter, full of current market trends and specific property details, is available at http://www.svnhighland.com or by calling Lock Richards at 530-470-1740.
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