June Leasing Market Tip - Steps to Commercial Leasing
STEPS TO COMMERCIAL LEASING
Are you ready to lease a space and wondering, “How do I do that? Let’s say you’re looking to move your business from your home office or a co-working space. Your business (or family) has expanded, and your space needs have grown beyond what you have been using. Or maybe your family is driving you nuts in your home office/workshop/studio. You have never done this before. Now what? Some common questions are-
How do I find a space? And is Craigslist a good way to find it?
Do I have to sign with a broker? And what is a Letter of Intent (LOI)?
What are the steps to leasing a space?
How long should my lease be and what about renewals?
Who pays the broker fees?
Let’s take these questions one by one.
How do I find a space?
Aside from the ever-present scams on Craigslist, there is no reason why it’s a bad place to look, particularly if you know exactly what you want and know how to protect yourself. Even if you are not a subscriber, you can look at the New England Commercial Property Exchange (Catylist). That is a good resource because you can filter by size, town, size and price. Non-members cannot save searches or set up an email alert.
Another alternative is to engage a broker to help you search. A commercial real estate broker has access to all the capabilities of Catylist and the Multiple Listing Service (MLS) to conduct focused searches Including multiple filters and sticky email alerts. Commercial brokers also have professional networks. At Keller Williams, the KW Commercial group also has biweekly meetings during which we share listings and client needs.
Do I have to sign with a broker?
The short answer is no. However, there are good reasons to engage a broker to help you with finding your leased space. A broker can help you conduct the search, but they can also help you negotiate the terms of the lease. If you have signed a Tenant Representation Agreement with a broker, you can be confident that the broker is representing your best interest. In real estate law, a representation agreement requires the broker to put your interests above theirs, to keep your communications confidential, and other behaviors consistent with being a “fiduciary.”
Until you sign with a broker, you are not a “client,” you are a “customer” and the broker does not have a fiduciary duty to you, however they are required by law to be honest to you.
What are the steps to leasing a space?
1. Identify the best spaces that meet your needs. Once you (and your broker) have located potential spots, you will want to see it for yourself. Recently, I had a client who was moving to Maine from Colorado, so I took video and still photos for her to look at, because she was unable to see it for herself. More than likely, you will be visiting it in person. Make sure you have considered all the characteristics you are looking in addition to square footage. Some needs include good street visibility, high ceilings, loading docks or bays, elevator, parking (for staff and customers), close to amenities, highway access, adequate existing or potential expansion or modification of plumbing and electrical services. Signage locations and size (towns tend to regulate outside signage). Will you need 3-phase power? Is there room to expand when your business grows? The listing services will be searchable on some of these characteristics, but not others. Some you will not know until you actually go there. If you have a broker, you can give your broker a list of all your needs, and they will ensure that all the candidates for your consideration have those characteristics.
Do not forget, zoning restrictions might make it legally impossible for you to do what you want to do. Make sure the Town’s Code Enforcement Officer will allow you to have your business in that location!
Of course, the Craigslist listing will only have information on whatever the owner thinks will attract tenants. Catylist has checkboxes and searchable fields that encourage listing agents to show information that goes beyond the basics.
2. Determine whether the landlord and you agree on basic lease terms:
Minimum (or maximum) length of lease
Price
Do you fit the landlord’s financial criteria?
Can you afford it?
3. Write a Letter of Intent (or Interest), or LOI, that defines the terms you would like to see in the eventual lease. If you have ever bought property, you started by making an offer that became a binding contract if the owner signed it. The offer was accompanied by earnest money, and you couldn’t back out easily, or without losing money. On the other hand, an LOI is a non-binding offer that is the opening move in your negotiation.
An LOI will usually contain:
How much space you’re leasing
The length of the lease you desire and when it starts
Whether you will want renewals (more on this in a moment)
The amount of money you’ll pay for it
Who pays for what (electric, heat, plowing, sanding, taxes, and other common expenses)
Whether the landlord will have to do work on the space, whether you want to do work on the space, and who pays for it.
What the space will be used for
How the broker will get paid (if there is a broker—more on this in a moment)
Other stuff you want the landlord to do, provide, or allow, like signage for example.
When the LOI expires (not usually an earth-shaking clause, but it encourages the landlord to take your offer seriously—especially if you have a number of spaces you’re considering).
The LOI can be a detailed document or simple, but the idea is to ask for everything you want included in your lease. The landlord will come back with their own wants, and when there is finally agreement, the landlord will provide a lease that includes the agreed upon terms.
4. The lease. If you are using brokers, the lease boilerplate will usually be a fill-in-the-blank standard form that includes a lot of legal language. Make sure you read it carefully and that you agree with the terms! If you have any questions or want to change the language, consult a lawyer. Your broker cannot write a contract for you or provide legal advice.
If you are not using brokers, who knows where the lease comes from, the Internet, the State, or the landlord’s own language? Be especially careful with a home-made lease. If you have engaged one, your broker can tell you if there is something weird about it, but by law they can’t give you a legal opinion.
When you sign the lease, you will need to hand over some cash, maybe first month’s rent plus security deposit, maybe some other amount.
5. The landlord prepares the space as agreed to in the lease and gives you the keys.
How long should my lease be and what about renewals?
The lease can be either a solid protective shield for you, or a noose around your neck, depending on its terms and your business prospects. It is a binding contract that makes you responsible for paying the rent on time for the entire term. If it says you are to pay $1,000/month for 36 months, you are agreeing to pay that amount, regardless of what happens to your business. If you have a renewal and you do not choose to take it, you can walk away at the end of the 3 years.
On the other hand, the landlord or a new owner, if there is one, is legally required to continue to rent the space to you for that $1,000 regardless of their financial situation. If you have a renewal, that lease extension is at your pleasure, regardless of the ownership of the building or land, and the terms are already written.
Who pays the broker?
In 99% of cases, the landlord pays the broker, and the tenant pays nothing. In the one in a hundred situation where your broker has been finding and showing you properties, and you find that perfect space on Craigslist but the owner refuses to pay the commission, the broker will ask you to cover their expenses. This will not come as a surprise to either of you, the broker has been working and will expect to get something for their work.
For more information and to set up a private leasing consultation, reach out to Nicholas Herold today!
Written by Nicholas Herold, Associate Broker for The Fletcher Group