For a business to flourish, it is important to be present where your audience frequents. Hence, the location of your business plays an integral role in making your brand visible. Committing to a property, or location is a huge investment and hence many business owners contemplate between leasing and buying a commercial real estate up for sale (e.g. commercial properties for sale in pa). While buying would allow you to own an asset whose value only keeps on appreciating, you need an equal amount of initial investment and hence most business owners tend to lease commercial properties. Unlike residential spaces, finalizing a commercial workspace requires extensive research and a greater level of commitment and it helps if you check out the available places with some foresight.
Assuming that you landed here looking for help on how to lease commercial real estate, hang tight, this article is what you need for understanding the basics of Commercial Real Estate Leasing.
Common Types of Commercial Real Estate
Just like you have different types of houses in residential real estate, depending on the business type, commercial spaces are also available in all shapes and sizes. For ease of understanding, we shall categorize the different commercial properties into six major categories:
1. Hospitality - Hotels ranging from Bed-and-breakfast to full service hotels as well as restaurants need to be either serene locations or in the heart of the city to be successful. So the buildings pertaining to hospitality come under this category. Such buildings are spacious with multiple rooms leased to a single entity (brands, board of members, etc.)
2. Retail - Malls, Shopping centers, and places for commerce come under retail. These types of buildings have smaller sections leased to individual stores.
3. Office Spaces - Dedicated office spaces for administrative and backend operations of corporate brands. These are generally in premium locations and high-rise buildings.
4. Industrial - Factories, warehouses, and manufacturing plants fall under this category. These spaces are generally open plots or a central structure for the movement of heavy vehicles and housing specialized machineries.
5. Multifamily - These are commercial spaces within residential buildings such as convenience stores and small businesses in the lower levels and residential units in the upper levels.
6. Special Purpose - Commercial areas that require specialized buildings or layouts such as amusement parks, parking lots, theaters, zoos, and etc., fall under this category..
Additionally, you may also see commercial buildings listed as section-A, section-B, and section-C. Depending on the location and infrastructure quality, the buildings are certified these classifications.
Class-A: New or recently renovated buildings with all modern amenities. These are mostly premium real estate and are mostly situated in the most popular parts of the city. Such premium places come with a price tag to match with the rent, utilities, and other operational costs tipping on the expensive side.
Class-B: These are slightly inferior compared to class-A but they are regularly maintained or in buildings with limited facilities. Rent at such buildings are comparatively lower. These are ideal fit for single owners or small businesses or for company offices.
Class-C: These are properties that are in neglected state or very old buildings with severe lack of modern amenities. These places are fixer uppers and can be leased for very cheap. Ideal of people with limited budgets and are considering renovation.
Types of Commercial Leases
Unlike the lease for residential properties, there are different types of commercial leases and each lists out different financial implications on the property owner and tenant. The lease conditions chart out the different responsibilities such as property taxes, insurance, maintenance and utility bill payments for the landlord and tenant alike. This determines the overall rent amount, before negotiation. The different types of commercial leases are:
1. Gross Lease: The landlord takes care of the expenses i.e., property taxes, insurance, utilities and cost of maintenance while the tenant only pays a fixed rent amount. Since all financial liability is managed by the landlord, the overall rent is comparatively higher.
2. Net Lease: This lease type involves the landlord and tenant spliting the expenses. Depending on the different expenses borne by the tenant, the net lease can be further divided into three categories.
a. Single Net Lease (N Lease): In addition to the rent, the tenant pays the property taxes.
b. Double Net Lease (NN Lease): The tenant pays the property taxes as well as the insurance on top of the rent.
c. Triple Net Lease (NNN Lease): Opposite to the gross lease, here all the costs are borne by the tenant and hence the overall rent is the lowest.
3. Percentage Lease: Applicable to seasonal businesses as well as small businesses, on top of a low base rent, the tenant pays a percentage of their gross income. This helps the tenants in keeping the rent low during the slow seasons.
Depending on the relations between the landlord and the tenants, a mix between gross and net lease called the flexible lease can be opted. This purely relies on the trust and hence it is advisable for both parties to carefully read the lease clauses or agreements.
Steps to take before considering leasing
Define your Needs
Before you start to search for your ideal commercial properties, it is important to get the ‘big picture.’ Since leasing a commercial property for sale is a huge financial investment from your end, it is advised to evaluate the current financial status of your company, the projected revenue and the risk-taking ability. Additionally, setting up certain parameters will help you narrow down prospective real estates faster. Some of the most common criterias would be:
• Target Customer or Employee: Will you be having customers visiting your establishment? What kind of locality will your customers belong to? How far are office spaces from common transportation modes? What kind of neighbourhood do you see your store in? Consider the customers you are targeting or your employees as well as their accessibility to your property.
• Zoning Permits: Certain commercial buildings are only restricted inside pre-allocated zones. These zones govern the kind of business that can operate inside. So, depending on the kind of business you own, you need to explore your options within specific zones. To do so, you can contact local chamber of commerce
• Workable space: Next comes the amount of space you require for running your business. In businesses where you have customers visiting your place, you need ample space for them to move about. For office spaces, you need to consider your current workforce and anticipate the scalability in future to choose a place that can accommodate them.
• Rent and budget constraints: Final step to defining your need would be the rent. Irrespective to the leasing agreement, you will have operational costs to consider in addition to the monthly rent. So, once you have narrowed down to a handful properties, you can start eliminating those that won’t fit under your maximum budget.
Who all to involve
Now that you have zeroed in on your preferred locations, it is time to get the wheels turning. While DIY may sound lucrative as you save on commission, it is advisable to involve a real estate agent for leasing any commercial land for sale. Not only will their expertise allow you to find better locations and avoid any common mistakes but also they can help in negotiating the lease conditions better. When it comes to choosing commercial spaces, it is very easy for business owners to allow their emotions to get the better of them. Whereas an experienced real estate agent such as Pocono Real Estate, can study your requirements, do necessary legwork, and inspect the chosen locations for space management, overhead costs, and necessary permissions. Ideally, it is wise to include a contractor, an attorney, and the real estate broker when touring the site and meeting up with the landlord to discuss the different aspects of leasing the property.
Study the lease agreement like a hawk
A lease is a legal document that lists out the different conditions that both the tenant and the landlord have to oblige during the lease duration. Being a legal document, it is very important to carefully read it yourself and also consult an attorney for finding any loopholes and negotiating the terms mentioned. Make sure to check for the following factors:
• Lease Type
• Any upfront charges such as security deposits
• Capital Expenditures: Who would be responsible for any repairs, maintenance, or any other costs
• Compliance to any local acts, permits, or statutes
• Personal Guarantee
• Subleasing: Re-renting the property by the existing tenant to a new third party
• Leased area in square footage
• Lease term duration: Tenure of the property lease.
• Use clause: For what purpose would the leased place be used for.
• Rent amount and escalation: Current rent amount and projected raise in price after the tenure ends.
• Termination clause: Under what conditions would the lease agreement be considered null and void.
• Rent abatement clause: in a case where the property is damaged, the tenant doesn’t pay rent until the property is restored.
Hang the ‘We’re Open’ board on the door
Once the lease is signed, congratulations! You are now the proud owner of the new place till lease term ends. Unless the leased place requires some work to be fit for your business, you are ready to move in.
When leasing commercial real estate, the common goal for both the landlord and the tenant - making a standard income flow. Owing to the commitments and revenue involved, most businesses tend to lease properties for at least 5+ years, so it makes it worth conducting sufficient research beforehand. Finding out potential spaces can be easily managed by real estate agents, leaving you free to keep the reins of your business with yourself. Contact Pocono Real Estate for all kinds of real estate queries and our experts shall help you out.