A commercial real estate lease is a rental agreement that allows a business to rent commercial space from a landlord. Commercial leases come in three main forms: full-service leases, net leases, and modified gross leases. The process of identifying, negotiating, and signing a commercial lease is a long process and it’s important to understand the required steps which are discussed in detail in this article.
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1. Set Your Commercial Real Estate Parameters
The first step when leasing commercial real estate is to set your property parameters. This is because there is a wide range of commercial properties available for businesses of all types. These parameters will help you limit your search to commercial spaces that suit your needs. You might want to check the best property management for Perth residents the tenants would recommend the high standard residential property management services in Perth to their family and friends. Specifically, you’ll want to understand the following:
- Ideal customer (or employee pool)
- Property type and zoning
- Desired size
- Maximum budget
Let’s take a look at each of these commercial real estate parameters.
Ideal Customer (or Employee Pool)
Understanding your ideal customer is the most important property parameter if you’re a business looking to attract physical visitors to your location. Restaurants, retail locations, and similar types of businesses are good examples. Further, these businesses should know where their ideal customers are located.
For example, a fast-casual restaurant will want to lease a commercial space in an area populated by people who like fast casual dining. Alternatively, a Michelin Star restaurant might want to choose another location in a more affluent area. Check here if you are looking for affordable commercial full service gross lease
If you’re looking for office space, however, this isn’t as important. Instead, you’ll want to find a commercial space that’s convenient for your employees. You can conduct a similar analysis and find an area that’s highly populated by your ideal employee pool, such as is the case with Silicon Valley and the technology industry.
Commercial Property Zoning
All commercial real estate properties are zoned for a specific use. A warehouse is a good example of a commercial property zoned for industrial use. Other commercial zoning includes leisure, office, retail, and restaurant. The type of zoning dictates the type of business that can operate out of the commercial building.
For example, if you’re looking for office space, you won’t be able to lease property zoned for retail or a restaurant. Conversely, you can’t rent a space zoned for offices and convert it into a restaurant. Make sure that you understand your local zoning laws as well as the type of zoning your business needs.
To do this, you can check with your local chamber of commerce or by Googling either your zip code + zoning regulations or your city + zoning regulations. We give you an example of commercial property zoning when we discuss the commercial requirements and best practices for storefront sign zoning.
The commercial lease options available are largely dependent on the size and layout of the space you need. To calculate the size, you’ll need to determine the number of customers or the size of your workforce in order to derive the necessary square footage.
For example, restaurants and retail locations typically require 15 square feet per customer on average. Offices, on the other hand, typically require between 100 – 150 square feet of usable workspace per employee.
So, if you’re looking for a retail or restaurant location, you’ll want to figure out how many customers you expect to have, on average, and multiply that by 15 square feet. If you’re looking for office space, you’ll want to forecast the desired size of your workforce and multiply it by 100 – 150. This will give you the size of the commercial space you need.
Another thing you’ll want to determine is your maximum monthly budget. This will help you limit your searches to only spaces that you can afford. The maximum budget is largely dependent on your business’s size and performance.
To help, it’s important to determine the average price per square foot for your area. Price per square foot is typically derived from the annual lease amount divided by the total rentable square feet of the space. You can find the average price for your area by typing your zip code into LoopNet’s directory of commercial properties available for lease.
Once you find the average price per square foot, you can take it and multiply by the square footage you need for your business. This should give you your expected annual budget for your commercial lease. Divide that by 12 to find your expected monthly lease payment.
From there, you’ll want to add up your expected utilities and common area maintenance fees (CAM) and include it in your max budget calculations. A good rule of thumb is that utilities will typically run you ~$2 per square foot annually and CAM fees will cost between 15% – 35% of your annual lease payment.
You’ll also want to include expenses for any expected build-outs or annual rent increases. The cost of build-outs are largely dependent on the type of business, but it’s possible to get the landlord to cover some or all of the costs. For rent increases, expect that your lease payment might increase as much as 3% annually.
From there, you need to ensure that your maximum budget doesn’t exceed 8% of your expected annual gross income. Anything higher could put your business in financial distress.