Leasing commercial property is one of the critical engagements in which a business owner must take into consideration. Hence, getting there and knowing the steps for leasing serves as guidance essential to every business owner, especially in attracting investors or tenants alike. And while leasing commercial lease estate is confusing and intricate, here are the following steps that will guide potential lessees through the critical stages of the lease process.
Eight (8) Steps in Leasing Commercial Real Estate
STEP 1: KNOW AND DETERMINE YOUR NEEDS
It is essential to have an idea of what specific needs and wants you have in mind. This is so because knowing the particular details of your wants and needs narrows down the search for spaces that will work for your business. There are three significant factors in helping you make the right decision: location, rent budget, and type of space.
Location is essential since this affects the viability, quality, and value of your space. Considering the area, the environment, where the customers are located, is the place accessible, what other businesses offer a synergistic relationship, and most importantly, where is the competition found?
Cost or Rent budget is another factor that must be considered. Monthly rent is determined by various variables, such as lease rate per square foot, utilities, additional tenant improvements that are amortized into the rent, and annual rent increases as provided in the lease contract.
Type of Space. The kind of space is going to be determined by the type of product or service provided. Various types of commercial properties fall under the umbrella terms: Industrial Office, Office Properties, and Retail Properties. Getting to know these different commercial spaces is integral before beginning the search for the commercial space to lease.
STEP 2: RUN YOUR NUMBERS
Before you start looking for a commercial property to lease, you must first determine the costs thereof. Therefore, you should always bring a broker into the discussion to assure and provide detailed results concerning the estimated costs of leasing a commercial property since your overhead might be going from zero to a million. Hence, it is always important to be realistic and confirm that the business can weather the change.
STEP 3: TOUR THE SITES
Brokers will most certainly prequalify sites for you based on your specified requirements. They will bring together as many properties as possible to help you narrow the list. As such, it is your responsibility as the lessor to tour the optimal sites, preferably on the same day, since you will be able to make a reasonable comparison based on the specific criteria you have set up. It is rather vital to be reserved while touring the spaces to keep your negotiation leverage in the properties and the brokers.
STEP 4: WEIGH THE OPTIONS
After you have toured the sites, varying options will now be put before you. To make a better result that caters to the preferences of your tenants and employees, you must be able to make all the proper choices that will guide you in choosing optimal property—the competition, accessibility of the place, the ambiance, and the environment where the property is located. You are not opening a house but rather a business. Hence, while there are always properties that cater to your needs specifically, you must also consider certain factors that will affect your business as a whole.
STEP 5: CREATE A LETTER OF INTENT
Once you have chosen the property that suits the criteria of your needs, have your commercial real estate broker create a letter of intent (LOI) on your behalf to send it to the owner of the property. This LOI will state your eagerness or desire to enter into a lease agreement along with your expected terms. The LOI is not the actual leasing agreement; instead, it is heads of terms to start the conversation. Heads of terms refer to those terms which the brokers/agents will engage to facilitate and inspect field questions and agree on the critical points for any inclusion on the lease. And while the heads of terms are not legally binding, they form the basis on which any lease document is ultimately prepared.
STEP 6: BEGIN LEASE NEGOTIATIONS
Many sections of a lease establish the terms of an agreement between you and the owner. Lease negotiations is comprised of several factors including, namely:
- Length of the term;
- Lease rates;
- Concessions,e., a reduction in price, rent, or other benefit provided to a tenant or buyer as an inducement to buy or lease;
- Rate bumps or Rate increases; and
- Renewal options
These negotiations can take anywhere from a few days to several weeks or even months to complete, depending on the complexity of the lease.
An owner will also want to establish your financial credibility as a tenant. In other words, you’ll need to develop your trustworthiness to pay the rent due to the owner as a part of your agreement. Again, financials and other documents are used to establish this credibility.
STEP 7: IDENTIFY TARGET DATE OF OCCUPANCY
The date set for occupancy may be subject to change depending on the aggregate amount of Tenant Improvements that may be made. These improvements come in many forms, such as simple paint, carpet, constructing or demolishing walls, plantation improvements, landscaping, etc. The more complex the Tenant Improvement, the more likely the date will be adjusted. The important stage in the operation is when the tenant improvements are completed, and a Certificate of Occupancy has been issued for space.
STEP 8: MOVING IN
After signing the lease, you are ready to move in unless, of course, a “build-out” is necessary. A build-out occurs when the space is not designated to suit your needs, a build-out is required to get it to working condition and be ready for the occupant. After the build-out is finished (if needed in the first place), you are prepared for business. However, it is essential to remember that there is a continuing responsibility to comply with the lease terms. If you are in default, you could get evicted from there. So be careful and read the terms and conditions lest you are ousted from the property leased.
Even after outlining all the information above, investing in CRE can still seem daunting. That’s why the Leveraged CRE Investment Team at Commercial Properties, Inc. is here to help you achieve your investment goals. Contact us at (480) 330-8897 or send us an email at request@leveragedcre.com.
Need help on how to get started investing in commercial real estate? We got you covered! We prepared a free e-book that will serve as your guide to achieve your long-term business goals or obtain that property you’ve always been dreaming of!
Phill Tomlinson is a commercial real estate broker with Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, and owner of the Leveraged CRE Investment Team specializing in investment sales and tenant/landlord representation in the Phoenix and Scottsdale submarkets. Phill applies over 21 years of experience in the Real Estate industry helping investors and owners maximize their returns.
Bookmark www.leveragedcre.com to learn more about the Commercial Real Estate market and keep informed of relevant real estate strategies designed to maximize your income property investment results. Connect and follow Phill on Social Media at sm.leveragedcre.com/smplatform. #LeveragedCRE