Essential Tips for First-Time Leasing: What You Need to Know

Essential Tips for First-Time Leasing: What You Need to Know

The importance of working with the right advisor is critical to navigating the leasing market, particularly if you are new to the commercial real estate world. Over the past year I have been working with business owners to help them lease space across retail, office, and industrial buildings around the Denver metropolitan region. As a result of this work guiding entrepreneurs through the obstacles of leasing, I have put together the 3 Essential Tips for First Time Leasing.

Recent Retail Case Study

Tenant Representation: My client was overwhelmed by the prospect of searching for new space closer to home. I was able to come in as an advisor to identify several different properties in his target market. After reviewing all the different properties, I was able to coordinate a single day for my client to walk through each property. Being able to streamline the process helped save him time to focus on what is most important, his business. Not only was I able to guide him through the real estate leasing world we were able to lower his rate $3.00/SF under market rates and secure a 5-year lease term in a building he sees his business staying in for many years to come. Providing clear and concise information to my client gave him the reassurance to rely on me to handle his real estate needs so he can focus his time and energy on the day-to-day operations of his business.

The 3 Essential Tips for First-Time Leasing

Essential Tip #1: Understand the Leasing Process

Understanding the complexity of the leasing process is crucial. Leasing involves multiple stages of negotiation between tenant and landlord. Here’s a closer look at the process:

• Partner with the right broker/advisor: It is important to find the right broker/advisor with the experience and expertise to guide you through the leasing process, help find the right space for your business and secure the lease deal you need.
• Conduct initial due diligence: Work with your broker/advisor to analyze the market, identify the right location, and assess available lease opportunities suitable for your business and budget.
• Submit a Letter of Intent (LOI): Once a property that suits your business is identified, submit an LOI that signals your interest and initiates the leasing discussions.
• Negotiate Deal Terms: Work with your broker/advisor to negotiate with the landlord, understanding where you can push for a better lease rate, higher tenant improvement dollars, or other aspects of the deal terms that result in an attractive deal for you.
• Show Financial Stability: After agreeing on an LOI, landlords typically request proof of financials. This step assures landlords of your credibility and ability to meet lease terms. Make sure you have the right documents in place to give them the comfort level they need to sign a lease with you.
• Draft, Negotiate & Sign the Lease: Once your credit is established, the landlord will draft a lease agreement outlining the LOI terms. You will need to work with your deal team to negotiate important components of the lease, making sure you have the strongest protection possible for you as the tenant. Once both parties sign, the lease becomes effective, and you and your business will take possession on the agreed-upon date!

Essential Tip #2: Understand Lease Rates and Common Lease Types

Knowledge of lease rates and types is critical. Base rent and additional costs make up the total annual leasing expense, so understanding these elements will help you budget effectively

• Base Rent: Most commercial leases quote an annual square footage rate as the base rent paid by the tenant.
• Operating Expenses: Lease types often determine the extent of operating expenses, such as property taxes, insurance, and common area maintenance costs to be paid by the tenant.

Two of the most common commercial lease structures are NNN (Triple Net) and Full-Service (FS) Gross leases. Here’s how each one works:

• Triple Net (NNN) Lease: In a Triple Net lease, operating expenses are divided by the rentable square footage and added to the base rent. For example, if the base rent is $15/SF and operating expenses are $8/SF, for a 1,000-square-foot space, the total rent is $23/SF or $1,916.67 per month.
• Full-Service Gross Lease: With a Full-Service (FS) Gross lease, operating expenses are typically included in the rent.

Essential Tip #3: Partner with the Right Expert

It is critical to work with the right partner through the commercial leasing process as you transition your business into a physical location. Navigating the process takes time and working with a dedicated real estate broker can streamline the process, helping you avoid costly missteps along the way. This will save you time and money, ensuring clarity at every stage in the process. Understanding lease rates and types is a critical component of the negotiation, and there are many nuances to the structure of a leases which might include “Base Year Expense Stops,” “Expense Caps,” etc. Having an experienced real estate broker by your side is important so you can secure a lease deal that best supports your business goals over the short and long-term.