How To Negotiate a Commercial Lease
The value of location cannot be overstated. That’s why Prologis operates in all of the major markets that matter most to your business. Location should always come before budget. Lease a small space if necessary, as long as it’s located in the most advantageous place.
Before you start negotiating your next lease, know your company’s current and future needs in terms of commercial space. Have a budget in place when you begin exploring options.
Start by researching leased properties in the desired location to learn the going market rate. Or speak to a logistics real estate broker to get up-to-date lease rates. Knowing the current market rate is critical to getting a fair price for your warehouse rent.
When negotiating a lease, always seek tenant inducements. If the space has been vacant for a while, the landlord is probably eager to have a tenant. Consequently, the landlord may be willing to offer you a month or two of free rent or pay for a portion of renovations you need to make.
If you take on all the costs of renovating the space, be sure to negotiate for leasehold improvements. This clause requires the landlord to reimburse all or a portion of your renovation costs, should the property owner break the lease.
Review all incidentals you’re required to pay, and make sure they fit within your working budget. Ask about future increases in base rent and renewal conditions, so you won’t be surprised when these issues arise down the line.
If you are a retailer, you may want to ask your landlord for a competitor clause, which requires the landlord to obtain your consent before renting space in the building to one of your competitors.
Before signing the agreement, make sure you review the termination conditions. These explain what happens in the event of change, such as if the landlord decides to sell the property or you need to expand to a larger space before your lease ends. Termination conditions also spell out which actions on your part grant the landlord the right to evict.
Lastly, have a lease agreement looked over by an experienced commercial real estate attorney. Commercial leases are complex, and a lawyer can identify mistakes and problems easily.
How To Prepare for a Commercial Lease Negotiation
When preparing for a commercial lease negotiation, it is important to understand the lease options and associated costs. It’s also important to be familiar with different types of leases in order to choose the right one.
Types of commercial real estate leases include:
- Gross rent lease: A single amount is paid to the landlord, which covers base rent and all incidentals, including utilities, property tax, insurance and maintenance, repairs as well as common area expenses, such as snow removal, janitorial services, landscaping and property management.
- Modified gross rent lease: This agreement is the same as a gross rent lease, except the landlord shares the financial burden for incidentals.
- Net Lease: The tenant pays base rent and certain incidentals—such as utilities, insurance and property taxes—and the landlord pays the rest.
- Percentage rent lease: Most common in malls and other multi-tenant retail locations, this type of lease requires tenants to pay base rent plus a percentage of gross sales over a certain minimum.
In most situations, the landlord will provide the lease terms. Never sign an agreement without reviewing it carefully. If the terms aren’t favorable, counter the offer with better conditions for your business—and continue to do so until both parties are satisfied.