You’ve made a big choice: you’re going to take the plunge and rent a commercial space for your business. It’s not time to kick your feet up on the desk just yet, though. First, you’ve got to find the right location and sign the lease, which can be easier said than done. For small businesses, learning how to negotiate a commercial lease is a big deal. It impacts your budget, your company’s image, and your strategic growth plans.
In this post, we’ll discuss what you need to know about negotiating a commercial lease, how to find the perfect retail space, and more.
What is a commercial retail lease?
A commercial real estate lease is an agreement that allows a business to rent property from a landlord or property owner. While the details of each lease agreement vary depending on the property owner, location, and other details, commercial leases all grant the leaseholder the right to conduct business in the leased location.
For example, say you’re a cosmetologist who has been running a business from home for a few years now. You’re taking on more and more clients, and now you’re ready to open a salon and hire a few employees. A commercial lease will provide you the space to do that. While a commercial lease isn’t a substitute for a business license, which you’ll likely also need, it does provide you with some additional business cred as well as legal protection under the terms of the lease.
Why do small business owners need a lease?
If you’ve been working out of your home or selling through an e-commerce store, signing a retail lease agreement has many perks.
First, a commercial lease can help you boost sales. While online sales have surged in recent years, they still only represent a fraction of the total retail market in the U.S. Even stores like Amazon are expanding their footprint into brick-and-mortar locations. Other online businesses are following suit.
Right now, 46% of all Google searches are seeking local information, and 88% of consumers who conduct local searches on their smartphones call or visit a store within 24 hours.1 As such, having a physical retail location is a great way to claim a larger share of customers than you would in a digital-only setting.
Also, signing a commercial retail lease adds credibility to your operations, gives you space to grow your team, and protects you legally. A lease agreement grants you the right and privilege to do business in a given location and establishes expectations and responsibilities for both landlords and tenants.
Types of commercial retail leases
There are three types of commercial leases:2
- Full-service leases. Full-service leases are the most common commercial leases. Under these agreements, the landlord pays property expenses like maintenance, repairs, and utilities. This is an excellent option for small businesses on a set budget who need to accurately forecast their monthly lease payments.
- Net leases. Under a net lease, the landlord agrees to charge the tenant a lower annual rent, reserving the right to include monthly expenses like property taxes, maintenance, and insurance. There are three types of net leases:
- Single net lease: Tenants pay rent and a prorated share of the property taxes for the building.
- Double net lease: Tenants pay rent, property taxes, and a portion of the property insurance.
- Triple net lease: Tenants pay a prorated share of property taxes, property insurance, and expenses.
- Modified gross leases. A modified gross lease falls between a full-service lease and a net lease. Tenants typically pay a part of the property taxes and insurance for the building as a lump sum delivered with their monthly rent payments. Modified gross leases “fix” the rent, which prevents unexpected expenses. If the taxes or insurance on the property increase, the rent stays the same.
While full-service leases are the most common, a tenant may prefer a net lease if they want lower monthly rent. Meanwhile, a modified gross lease allows a tenant to assume less responsibility for the building and control the monthly budget more than a net lease.
While the right type of lease will depend on your goals and your company, understanding the various kinds of lease agreements is an excellent place to begin your property hunt, at which point you’ll want to know how to negotiate a commercial lease.
Tips to negotiate a commercial lease
Ready to get out there and find the right lease for you? Use these tips on how to negotiate a commercial lease agreement for your company.
Evaluate your needs and budget
First, determine how much space you need and what you can afford to spend each month. Commercial lease options come in various sizes and layouts, and understanding your requirements will help you find the right one.
As a general rule, restaurants and retail stores typically require at least 15 square feet per customer, while offices may need up to 100 square feet of workspace for each employee.3
As far as budget goes, a common rule of thumb is that commercial tenants should expect to pay 5% to 10% of their gross sales per foot on rent.4
Do real estate market research about rental prices
The price you ultimately pay for a building depends on how large it is and where it’s located. To make sure you’re getting a fair price, we recommend doing market research on rental prices in your chosen area.5
To get as close to an “apples to apples” comparison as possible, use “average price per square foot” as a benchmark to compare buildings. Understanding prices now will help you identify the right retail space and secure it quickly when the time is right.
Find a space
Now comes the exciting part — finding suitable commercial space for your business. Start searching for a space at least 6–12 months before you need to move so you leave yourself plenty of time to prevent bottlenecks, make the process less stressful, and reduce the chances that the move will interrupt your business operations.
Find a commercial lawyer or broker
To help you find the right space, we recommend hiring a commercial lawyer or a commercial broker. These professionals can help you search for and identify the right property for your needs, avoid legal snafus, and protect your business.
A commercial lawyer will help you draw up a commercial lease agreement or make sure the one you’re presented with protects the best interests of your company. A commercial broker, meanwhile, will help you search for and find a commercial space to lease.
Negotiate your lease terms and prices
Next, let’s talk about how to negotiate a commercial lease agreement. Most small business owners assume that they have to take the terms of the lease as they’re offered, but that isn’t necessarily true. Usually, there’s room to negotiate lease terms according to your needs and preferences. More on that in the next tip.
Don’t take the first offer on the table
Don’t jump at the first offer a landlord makes. Instead, bide your time and make sure that the terms of the lease truly work for you and your company.
Ask for favorable lease terms where possible
Be proactive about seeking the best lease for your business. Here’s what we recommend looking for:
- Inducements. Lease inducements are things landlords use to make their property more attractive to tenants. In other words, an inducement gives the tenant something in exchange for signing the lease. For example, the landlord may agree to buy out a tenant’s previous lease, pay for fixtures, appliances, or moving expenses, offer a period of no rent, or even provide a low-interest loan toward business startup costs. Inducements can be a major benefit for small business owners.
- Improvements. A lease improvement is a change a landlord makes to their rental property to customize it for the needs of a specific tenant. For example, if you run a small bakery, your landlord may offer improvements in the form of adding and paying for the installation of a commercial kitchen. Improvements can be key to finding a space that truly suits your needs.
- Allowances. An allowance is a sum of money given by a landlord to a tenant to pay for improvements to a rental space. Typically, the tenant oversees the execution of these improvements, but the landlord helps offset or, in some cases, completely covers the cost.
- Long-term leases. Long-term leases provide an extra layer of comfort and predictability for tenants. A long-term lease (typically defined as a lease of longer than one year) ensures you won’t have to leave any time soon, and allows you to settle into your new space.
Read the fine print
It’s easy to get overwhelmed by the fine print in a commercial lease. It’s important to read this section, though, since its items can impact how your company does business. Keep a close eye out for caveats about where, when, or how you can do business or any terms of the lease that may be problematic down the road, such as restrictions on lease renewals or financial terms that may cut into your company’s bottom line.
Give your offer
Finally, you can present your best offer to the property owner. By this time, you should feel well-informed about the property and prepared to submit an offer you stand by.
The best is yet to come for your business
Learning how to negotiate a commercial retail lease is exciting, regardless of whether you’re an established company or just starting a business. By doing your due diligence, knowing how to negotiate lease terms, and not jumping on the first offer that comes your way, you can find a commercial lease that works for your business and helps your company grow.
As you settle into your new space, don’t forget to protect your business with business owners policy (BOP), which combines general liability insurance and commercial property insurance. Here’s what it covers:
- General liability insurance: This coverage protects your business from the financial repercussions of third-party property damage and bodily injury claims. It also covers personal and advertising injury liability claims, like copyright infringement and libel.
- Commercial property insurance: This coverage protects the business property that is essential to your operations, like computers, display cabinets, specialty machinery and other office equipment. If equipment gets damaged in a covered loss, this policy will pay to replace it up to the policy’s limit.
With Thimble, you can choose from a policy by the job, month, or year. Just click “get a quote” or download the Thimble mobile app. Answer a few questions to see your quote, then you can click purchase — all within minutes. It’s insurance made simple!