How To Lease Commercial Real Estate - A Step By Step Guide: Part 2
Leasing commercial real estate is a process. There are consecutive steps that are herein recommended that should be taken by both the property owner (Lessor) and a prospective tenant (Lessee) before proceeding to the next stage in the process. If you understand these steps, then moving through the process will be much easier for both parties.
You've read through Part 1 of this step-by-step guide to leasing commerical real estate. At this point you've defined your parameters (type of space you need, square footage, budget, location), toured a few properties, and found a commerical space that you would like to lease. Now what?
Following is a recommended guideline for a business owner to enter into a commerical lease.
Understand the Terms
During a property tour a real estate broker may discuss the terms of the lease according to the property owner. Take this time to ask questions. It's important that you understand these terms and how they will affect the amount you will have to pay to the building owner each month.
A few questions you may want to ask may include, but not be limited to, the following:
- What is the lease term? When is the first rent payment due?
- What is the monthly rent?
- What items are included in the rent (i.e. utilities, snow removal, common area cleaning and maintenance, etc.)?
- Are there any increases in the rent throughout the lease term?
- Is it a triple net (nnn) lease? A triple net lease is one where the tenant is responsible for paying their portion of the property expenses (taxes, insurance, and maintenance).
- Which utilities are included in the rent and which are the tenant's responsibility to pay?
- What fees are due at the start of the lease term (first month's rent, last month's rent, security deposit)?
- How is trash removal handled?
- Is there available parking for employees? Customers?
- At the end of the lease term is there an option to renew the lease?
- And any other questions that may be specific to the property.
Present an Offer
If you decide a particular commercial property is one you would like to lease, submit an offer in writing to the commerical real estate broker who will then present the offer to the property owner. In addition to the items mentioned above, the written offer should include details such as:
- Your business name, address, and phone number.
- Description of your business.
- Business owner's name or person authorized to represent the business, address, phone, and email.
- Number of people you will have working at the leased premises.
- A description of how the space will be used.
- Any build-out requirements, specific to your business, and who will pay for the buid-out.
Rental Application & Credit Verification
In some instances, at this point the broker may ask the prospective tenant (Lessee) to also complete a rental application and provide a credit verification report, or allow the Lessor or Broker to apply for such report.
Presentation of a Proposal
If, after reviewing the offer, a property owner decides to proceed, the property owner might prepare a Letter of Intent (LOI). A Letter of Intent is a precursor to the execution of a lease contract. A Letter of Intent outlines the pricing and basic terms and conditions, and should not be a legally binding agreement. Accordingly it should include a sentence that states that the proposal is made in good faith but should not be construed as a legally binding agreement.
The proposal will be sent over to the prospective tenant who will review and, if acceptable, sign and return to the broker.
Preparation of a Lease
Once the basic terms are outlined and agreed upon by both parties (Lessor and Lessee) in the Letter of Intent, the prospective tenant can ask the property owner to prepare a lease contract.
The commerical lease contract is a formal agreement, between a landlord (Lessor) and a prospective tenant (Lessee), outlining the terms and conditions of the property rental. It is usually prepared under the advisement of the Lessor's attorney. The Lessee should also have their own attorney review all documents, including the offer to lease, the Lessor's Letter of Intent, and the lease, prior to signing.
Once the lease is signed by both parties, the first month's rent and security deposits are paid, and pending any specific contingencies within the lease, the deal is done!
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