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If you are new to commercial leasing and will be leasing a commercial space for the first time, here’s an overview of the commercial leasing process.
1. Find a location
Determine the demographic you want to reach and find an area that caters to that demographic. You will then want to research the market by considering the competition in the area and how your business will differentiate itself.
In analyzing your potential locations, you need to look at costs: I recommend creating a spreadsheet where you put all your costs associated with each place you are considering. You can now make a side-by-side comparison of different sites with a cost spreadsheet.
2. Tour with your general commercial contractor
Once you have visited all locations and analyzed the costs, you will tour the locations with your general commercial contractor. You will want your general contractor to assess the condition of the walls, floors, roof and foundation to ensure they are in good shape. In addition, check the availability and condition of electrical, plumbing and HVAC systems to ensure they are adequate for the intended use. Finally, if you need gas, you will want to ensure that gas is currently at the premises.
Make sure you have your general contractor evaluate the accessibility of the space. Ask your general contractor whether the property meets American With Disabilities (ADA) requirements.
After you tour with your general contractor, if you want to submit an offer, ask your general contractor to provide you with a quote. This quote will allow you to evaluate the cost of any necessary repairs or renovations.
3. Draft and submit a lease offer
If you are working with a real estate broker, they will be able to assist you in drafting your lease offer. You will want to ask your real estate broker for comps before you let them know the lease rate you want to offer. Remember, when reviewing comps, you need to know the big picture. Landlords often give tenants a cash allowance and free rent to get a higher rent.
After reviewing comps, determine your budget. Decide how much you will pay for rent, security deposit and other fees. Also, decide on the length of the lease you are comfortable with. At this time, you or your real estate broker are in a better position to prepare a letter of intent, often referred to as a LOI. Your LOI should outline your proposed terms, including the length of the lease, rent amount, security deposit and other relevant details.
4. Wait for a response
This part is the hardest for many of my clients since once the ball is out of our court, it can be challenging to know when it will come back in. If you seem too anxious, it will affect your ability to negotiate.
5. Review and negotiate
Once you receive the response from the landlord, you will either continue your negotiations or move on to another property. Please note that it is scarce for a landlord to accept an original offer from a tenant. Therefore, if you continue the negotiation process, you will engage in further negotiations until you reach a mutually acceptable agreement. This process can be as quick as a few weeks, but complex deals can last over a year.
6. Lease draft
If you agree with the landlord on the LOI, you will wait for the lease draft to review. I recommend you interview and decide on a commercial real estate attorney skilled in lease review and tenant representation during this time.
7. Attorney lease review
Once you receive the lease draft, send the lease along with the agreed-upon LOI for your attorney to review. Additionally, it is essential that you carefully read the lease agreement to ensure you understand the terms and conditions. You, along with your attorney, will want to verify the terms. Make sure that the lease agreement accurately reflects the terms that were negotiated.
8. Final inspection
Before you sign the lease, I recommend you do a final inspection. Typically the general contractor will do an initial review at no cost before this point. To get an in-depth inspection, they will require a fee. Considering the financial costs involved in the lease, it is a good business practice to pay for this final inspection.
9. Execute the lease
After you are comfortable with the lease and the final inspection, you will then be executing the lease. It is important to note that typically your time will start ticking when the lease is mutually executed. This time is most importantly specific to the free rent period.
10. Hire an architect, if applicable
You may need to hire an architect to draw plans if you make significant modifications. If the landlord has existing plans, it will save you money and time. I recommend you ask for these plans during your LOI negotiations.
If you need to have plans drawn, your architect will submit them to the city once they are complete. Each municipality has different speeds at they operate. You need to understand that you can only start your build-out once the plans are approved.
The process of leasing commercial real estate can be complicated and time-consuming. Therefore, I recommend you work with a commercial real estate broker, a general commercial contractor and a commercial real estate attorney to assist you in your journey.