Need a commercial leased space for your business? Get your ducks in a row.
Prepare your tenant package:
- When you rent a house you get used to the idea that the landlord would check your credit score, criminal/rental/financial background check. When you find a commercial space to lease for your business, landlord typically would want to see the items below. You want to get them ready so that you can present your case quickly and get landlords to feel comfortable to make prompt decision, especially when a location is desirable and more competing tenants with you, or when landlord is a group of decision makers and need a well-prepared package to share amongst themselves.
• The name and the concept
• Service menu
• Years of experience
• Any other locations. Provide addresses and websites etc for reference
• Are you forming an LLC or partnership etc. and who will be part of it. Would everyone need to sign or one designated signer
• Full names and financials from everyone: personal financial statements, last 3 months bank statements, and tax returns for current business and personal. Very typical for landlords to ask tenants to personally guarantee the lease unless you’re a big national credit tenant
• Link to Personal Financial Statement
• Are you married – they may need to sign a waiver if you don’t do an LLC
• How much money you have on hand for reserves and build out
• Do you have a business plan to share
-
It’s important to be specific about your
requirements on the space
• Locations
• Sqft: minimum and maximum sqft specified would be helpful.
• Monthly budget rent: get used to how commercial rent is calculated. It’s rarely $/month but $/sqft. Let’s look at an example:
- Sqft: 2,000
- Asking rent: $25/sqft NNN
- That means total yearly base rent is 2,000 sqft x $25 = $50,000.
- Monthly base rent: $50,000/12 months = $4,166.
- Let’s assume the NNN is $4/sqft, this adds additional rent to the rent payment: 2,000sqft x $4 = $8,000 yearly. Monthly NNN should be $8,000/12 = $666.
- The total monthly payment would be base rent + NNN: $$4,166 + $666 = $4,832.
- Remember NNN is calculated based on the actual spending from the landlords. So it can change year by year according to the actual propert tax, insurance and CAM expenses (common area maintenance).
- If the asking rent is Gross Rent or Modified Gross Rent, you don’t have to add additional rent into the calculation.
• What needed for your business operation: this largely depends on the industry. What needed for a Day Care is completely different than a Medical office or a warehouse. It can be the number of rooms or outside playground mandatory, the plumbing requirement or the thickness of the concrete floor.
• Regulatory requirements: depends on the municipals the property belongs to for the industry you operate. It can be the sprinkler system or the sqft per person in the building etc. - What’s in a LOI (Letter of Intent)?
- Commercial lease is typically be prepared by landlord attorney to be shared to tenant for review before signatures (hence as a tenant you should have an attorney to review for you too). Real estate brokers tend to prepare LOI for your signatures before landlords send it to their attorney and use it as a base to write the lease. The LOI typically includes the followings:
• Pertinent info: tenant name, address, sqft, offering rent etc.
• Intended use: make sure you list down current and potential uses you might grow into. Make sure you have “exclusive language” to prevent another competing tenant accepted by landlord for the services you provide.
• Additional rent: what’s the current amount? Is there a cap yearly?
• Lease period: landlords would be more flexible to negotiate on other terms with a longer lease, 5-10 years. 3 years is doable but 1-year lease would be rare to be considered. Any options to renew? What’s the rent rate for these option periods?
• TI (Tenant Improvement): for certain business you might need help from landlords for the cost of build out vs lower rent. Landlords sometimes can quote the allowable TI they have set aside for the space. If you want to request higher TI landlords can build that into a higher rent to offset the TI amount.
• Landlord improvement: what state of the unit/building the landlords would deliver to you: with/without concrete, with/without HVAC, remove certain demising walls etc.
• HVAC: who takes care of what. Even with NNN lease you want to be specific either landlord or tenant to take care of the repairs or replacement. If you’re required to have a yearly maintenance contract with the HVAC vendor and if you need to submit that to landlord for compliance.
• Sign: where are you allowed to hang your sign? In front of your space or on the building sign too? Dimension? Directional sign allowed?
• Parking: if multiple tenants in the building, do you have any designated parking spaces for your employees and customers?
• Lease assignment or sale of the business: are you allowed to sell your business and assign the lease to the business buyer? How does that process look like and if any cost involved?
• Your buyer broker compensation: your broker should negotiate that into the LOI to be paid by landlord. Refer back to your Buyer Broker Representation Agreement for more details.
• Letter of Intent is NOT a binding agreement. So it’s important to review the lease shared by landlord with your attorney in a timely manner to get it signed and make it binding agreement so you can be sure you get the space.
