What Every Business Owner Should Know About Leasing Commercial Space

The world of commercial real estate can feel complicated and overwhelming. As you walk through the process of honing in on your business objectives, searching through listings, negotiating your lease, and understanding the ins and outs of the agreement, we want you to understand the most important terms and strategies for finding the best space for you. At Regent Commercial Real Estate in North and South Carolina, we’re here to provide our expertise through decades of knowledge and hundreds of lease and sales transactions to help you understand what you need to know about leasing commercial space.

Leasing Vs. Buying Commercial Property: Key Steps to Success

When you’re considering commercial listings, the first and probably most important step is deciding whether you want to lease or buy. Of course, there are pros and cons to both options, whether you’re looking for an office building, searching for the perfect retail space, or checking out industrial properties.

Owning a property gives you the flexibility to do whatever you want with the space. You can expand, make improvements to the commercial building, and even sell your property, all without having to ask someone else’s permission first. Plus, as a commercial property owner, you’re building equity on your property.

On the downside, you’re responsible for all of the work that goes into keeping up the space. And, you’ll want to be sure of your choice. Purchasing commercial real estate is obviously a much bigger investment than a monthly lease agreement.

On that note, the benefits of leasing are that you are not responsible for all of the work and upkeep that comes along with owning a property. With a commercial lease agreement, you’ll have more cash on hand, and may also be able to find the right property choice sooner. Leasing can be an excellent choice for business startups who don’t know how fast they’ll grow or aren’t sure they’re ready to decide on a more permanent location.

Of course, it’s highly important to thoroughly understand the lease terms before agreeing and make sure they fit into your business strategy.

When we work with our clients on finding and choosing a commercial space, we walk through several metrics. These include:

• Determining where you’ll get the highest rate of return
• Examining your long-term business strategy
• Your plan for your property if and when you sell or exit the business

Types of Commercial Properties

There are six main types of commercial properties. These are:

• Industrial
• Flex
• Retail
• Office
• Medical
• Land

Industrial

Industrial properties include spaces that are made for industrial use, such as for manufacturing or warehouses. These spaces are not for public use and can range greatly in size. While some are only 10,000 square feet, others are 1,000,000 square feet or even more. Unlike most retail stores, industrial spaces reflect practicality more than attractive aesthetics.

Flex

Flex real estate is property that’s a mixture of industrial and office space. Generally, a larger portion of this type of space is taken up by a warehouse or multi-purpose space, while the front section is used for office space.

Types of industries that benefit from flex real estate space include manufacturing, construction, car dealerships, research and development, and medical distribution.

Retail

Retail properties are meant to attract the public. Malls, grocery stores, and restaurants are just a few popular types of retail spaces. These properties are generally located within walking distance of other stores and retail centers, and have easy access for foot traffic. Unlike warehouses or manufacturing plants, those looking for retail commercial real estate want a space that’s in a prime location to attract shoppers, with enough parking spaces to accommodate their consumers.

Office

Office space is generally classified as either urban/central business district (CBD) or suburban. Urban offices are usually located in the heart of big cities and/or in high-rise buildings, while suburban office space is usually outside of the downtown area or in an office park.

Office buildings are also grouped into three tiers: Class A, Class B, and Class C. These refer to the quality and prestige of the building. While Class A contains the most state-of-the-art buildings, Class B is the group of more average buildings – or those with good infrastructure but less popular locations – and buildings in Class C may be older, more dilapidated, or in an undesirable area.

Medical

Next, medical commercial real estate includes buildings that are specifically built or modified to suit healthcare providers. These buildings often boast maximum accessibility and are located in prime locations to attract and be convenient for their patients. Medical real estate can include both medical office buildings as well as hospital campuses.

Land

The last main type of commercial real estate is land, which is simply an undeveloped space with no buildings or infrastructure. The types of real estate in this category consist of agricultural land, infill land, and brownfield land.

Types of Commercial Leases

Now that we’ve covered the different types of commercial properties, let’s consider the different types of commercial leases. These include:

• Gross/Full Service Lease
• Net Lease
• Modified Gross Lease
• Percentage Lease

Gross/Full-Service Lease

A gross or full-service lease is an option that includes the landlord taking responsibility for all of the applicable services to the property, such as property taxes, utilities, maintenance costs, and insurance. With this option, the tenant is able to have a consistent and expected monthly fee, without worrying about the fluctuations of these other potential costs.

This option can be excellent for a new business owner who needs to have a consistent budget month after month. The downside of this type of lease is that the building owner generally needs to increase the rent slightly in order to compensate for the fluctuating monthly service costs. This type of commercial leasing is especially popular with property owners who have a lot of tenants, such as in large office complexes.

Gross or full-service leases do sometimes have an expense stop. In this case, if expenses rise above a certain point, the tenant will be responsible for contributing.

Because every lease is a little bit different, even within each specific category, it’s important to read the fine print and make sure that you fully understand the lease terms. An experienced commercial real estate agent can help you make sure that you’re not missing any important information in regards to your agreement and that you’re getting the best deal possible.

Net Lease

This lease type is virtually the opposite of a gross lease. In this category, the tenant is responsible not only for the monthly rental rate, but also for all (or a portion of) the other costs, such as utilities, property taxes, and maintenance.

There are three categories within the category of net leases. These are:

• Single net lease. In this tier, the tenant pays both the base rent and the property taxes.
• Double net lease. Building on a single net lease, this option has the tenant paying for base rent, property taxes, and insurance costs.
• Triple net lease. Lastly, a triple net lease has the tenant shouldering the comprehensive burden of costs for a commercial property, including taxes, insurance fees, and maintenance costs. Oftentimes, these are long-term leases.

A net lease puts the tenant in charge of the property to a much higher degree than a gross lease. This extra responsibility and risk, of course, has pros and cons. While tenants may have the ability to save in some areas, they also bear the responsibility of large maintenance costs and unpredictable expense increases.

Modified Gross Lease

This option is a combination of a gross lease and a net lease. In this model, the landlord takes on the responsibility of the expenses outside of rent for an initial period of time (often the first year). These categories may include utilities, maintenance, property taxes, and insurance. After an agreed-on period of time, these expenses will begin to transfer over to become the tenant’s responsibility.

This situation is popular with startup businesses, who are able to save money on the operational expenses of the lease initially so that it can be allocated to other areas of the business instead. It can also be beneficial for landlords, who are able to attract more tenants with the lower initial rate.

As with all leases, the terms of a modified gross lease can fluctuate, so it’s imperative to understand the details of the lease agreement thoroughly.

Percentage Lease

A percentage lease is popular for tenants who are in the retail space. In this type of lease, the tenant pays a slightly lower base rent but is also responsible for paying a percentage of the monthly revenue to the landlord. This type of rental agreement is popular in the business districts of North Carolina and South Carolina and other populated areas.

This type of lease creates a reciprocal relationship between landlords and business owners. In this situation, the landlord is especially motivated to help the business prosper by caring for their needs as a tenant, knowing that increased revenue benefits his or her bottom line.

How to Find the Best Commercial Space to Lease

How do you find the best commercial space for you? The most important step is assessing your needs before you begin to look at properties. You’ll need to carefully take into account your business goals and growth strategy, consider what type of lease is best for you, and hone in on other important, everyday factors.

The top categories that tenants need to consider when searching for an available space include:

• Location
• Price of the rent
• Functionality of the space
• Business terms

At Regent Commercial Real Estate, our process of finding the perfect property includes a weighted criteria list. This strategy allows us to structure our search strategy in order to find the listings that meet the greatest amount of your most important criteria for building your business.

Questions to Ask About Your Potential Lease

Learning how to negotiate a commercial lease can feel incredibly overwhelming. The commercial real estate world is complicated and intricate, and finding yourself surprised by hidden lease terms months into your lease can be devastating for small businesses. For this reason, we always recommend consulting with an experienced commercial real estate agent who can save you both time and expense as you move toward signing a commercial lease agreement that fits well for your business.

Here are some of the top questions you’ll want to ask about your potential lease:

• What is the lease type?
• How long will the agreement last?
• What improvements can I make?
• What are my responsibilities for the property?
• What amenities are included (utilities, restrooms, HVAC upkeep, security, trash removal, etc.)?
• What insurance is necessary?
• How many parking spaces are allotted?
• Are there shared common areas?
• Am I allowed to sublease?