How to Negotiate a Commercial Lease for Retail Space

Negotiating leases for commercial space requires some skill and knowledge.
Negotiating leases for commercial space requires some skill and knowledge. (Image: Jupiterimages/ Images)

Negotiating a commercial lease can be a monumental task for a small retailer. There are so many things on your to-do list on any given day and trying to negotiate a tenant-friendly lease can be next to impossible. Commercial leases are written in legalese and contain many sections that can be critical to the success or failure of your business if they are overlooked. Most leases, however, contain some main clauses that you need to know about. It is advisable to consult a lawyer before signing any contract.

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A landlord-friendly lease favors the landlord. A tenant-friendly lease favors the tenant. As a tenant you want to negotiate a tenant-friendly lease. Knowledge of your local economy will strongly determine whether your lease is fair and as tenant-friendly as possible.

Base rate: The base rate is the amount of money per square foot that you will pay to the landlord. The base rate is typically expressed in dollars per year per square foot. It is handy to convert this into a monthly cost per square foot. For example, $36/sq ft per year is $3/sq ft per month.

Negotiate the lowest fair rate per square foot that you possibly can. Know that landlords negotiate based not only on current market conditions but forecasted market conditions.

For example, you may be seeking a space in a center that is 90 percent occupied and asking $3/sq foot per month. The landlord knows that, based on their economic forecast and knowledge of current tenants financial conditions, the shopping center will be 70 percent occupied within an 18-month period. The landlord also knows that their center needs to appear prosperous in order to attract high-quality tenants in the future. The landlord will most likely be willing to negotiate a discount off the asking rate if they believe that your store will enhance the tenant mix in the shopping center. The last thing a landlord wants is an empty shopping center. Offer $2/sq ft per month. It never hurts to ask. But remember to stay realistic. An offer of $1.75/sq ft will probably get tossed back to you as not accepted.

NNN or Triple Net: Most modern leases are NNN leases. NNN is a variable expense incurred by the tenant to cover expenses incurred by the landlord such as property taxes, landscape maintenance, lighting, capital improvements, security patrols, garbage, water and sewer. NNN is typically not negotiable because it is a hard expense that does not go away even after the landlord has made their last mortgage payment on the shopping center. The only negotiation here is your pro rata share and how much of the common areas you are responsible for. The typical negotiable options are the way your pro rata share is calculated - GLOA or GLA.

Spend your time negotiating other sections of the lease.

Build out is the money that a landlord gives to the tenant to improve the space that the tenant will occupy. Improvement plans will probably need to be approved by the landlord (after all, it is their money that they are investing). You may be able to increase or decrease your build out allowance as other sections of the lease and depending on the type of business that you are planning to open.

Your store hours are another negotiable item. Make sure that you qualify any special closure days and hours. You may be able to have this clause removed from your lease entirely (depending on the type of shopping center). Customers have some tolerance for mom and pop stores having shorter boutique hours. But, imagine a store in a shopping mall that seems to be closed all of the time because of sporadic business hours while the other stores in the mall remain open. Now you can see why a store's business hours are important to the landlord for mall customer satisfaction.

Relocation is something that may be important to you. Are you moving into a crowded mall with only low traffic spaces available? If you hope to get into a specific mall by accepting a less-than-ideal location within the mall then you should work on building a relocation clause into your lease so that you have the option of moving when a more desirable space opens up in the mall.

You should also understand the relocation clause from the landlord's perspective. How many times are they allowed to relocate you and what will the impact of a relocation be on your business? Sometimes it can be positive. Sometimes it can be negative. Landlords really do want you to succeed.

How many months of free rent is the landlord willing to give you? The more you get the better your cash flow will be in the critical period in between when your store opens for business and when your customer base grows to be large enough to sustain your business.

Can you sublease a portion of your space to another business? This comes up more often that you might think. Especially as you get to know other business owners who may be downsizing their operations and want a smaller footprint such as sharing space with you - or another retailer expanding their operations with the store-in-store concept.

A landlord will require you to specify the type of usage that you intend to operate. Will it be financial services, teenager retail, electronics, etc. A landlord uses this information to establish a balance in a shopping center that is most beneficial to the patrons of the mall. Imagine a mall with 10 nail shops and five shoe stores. Not the best mix in the world. If you ever change your space usage, then the landlord needs to approve the change in advance.

Lease term: The term of your lease has much to do with the rest of your lease negotiations. For example, a landlord is more willing to give you concessions when you sign a long term lease of 10 years or more. Most large companies negotiate 10 and 20 year lease terms. Most mom and pop businesses want to negotiate the shortest lease term possible so that they can exit the lease if their business sours. A landlord wants a business to stay for as long as possible more as a way to create a positive image of the shopping center and operations reasons than for revenue reasons. Signing a five to 10 year lease is typically best for a small business looking at a space 5,000 square feet or smaller.

Tips & Warnings

  • It is advisable to consult an attorney before signing any contact
  • Do not let a broker rush you into signing a lease
  • Do not sign a lease that you are not comfortable with

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