There is a lot of back and forth that’s involved in negotiating a commercial lease. With residential properties, it’s a simpler process. You set a price and then find a qualified tenant who is willing to pay it. With commercial properties, you’ll set a target price and then have more to negotiate because maintenance, CAM charges, annual increases and other items can all be negotiated to your advantage at the onset of a commercial lease. Certainly the rental rate is critical, but these different terms are just as important. Today, we have some tips on how to do that.
Negotiating Lease Terms
Generally, a commercial lease agreement will be between three and five years. Both the landlord and the tenant want some security and certainty, and a lease term in that range provides it. You don’t want to go any longer than that because we can never predict how the market is going to behave. There’s no sense in locking yourself into a lease where you’ll be collecting below-market rents for 10 years. You want to incentivize your commercial tenants to renew their leases as well, so include a holdover clause which will increase their rent if they don’t sign a renewal before the end of their current lease term.
Negotiating Rental Rates
You’ll be talking about the face rental rate, which is what they’re paying you every month, and then you can also negotiate the net effective rent, which factors in any free rent or tenant improvements you’re willing to provide at the time a lease is signed. The tenant might want new floors or carpets, or they might want a subdividing wall. You’ll need to consider those requests and build the cost into the rental amount. It becomes a math equation, and this process can take between two weeks and two months. We try to get it done quickly, but we balance that urgency against the desire not to lose or push good tenants out.
Once we have a lease term, rental rate, and any tenant improvements or rent reductions outlined into our lease, we’ll discuss the entire commercial lease agreement with the property owner. We know that property owners are more invested in how their commercial properties are performing than in residential units. If you have an apartment building with 30 units, the lease terms and rent amount for just one of those units doesn’t really matter to your bottom line. But with a commercial space, you might only have five units in a building, so avoiding vacancy is especially important.
These are some of the things to consider when you’re negotiating your commercial lease agreement. Remember to focus on the term of the lease, the rental amount per square foot, and whether any improvements or rent reductions will be factored into that lease. If you have any questions about Los Angeles commercial property management, please contact us.