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Twelve Tips for Those Negotiating a Commercial Lease

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    A long-term commitment is frequently required to enter into a commercial lease. Like any long-term commitment, confirming that the location and lease conditions meet your requirements and circumstances is crucial. You will be putting yourself in a stronger long-term position while negotiating a commercial lease by adhering to the 12 suggestions listed below.

    1. Rent

    The typical method used to negotiate commercial leases is on a per-square-meter basis. The annual cost of the lease is typically calculated by multiplying the square metres of the premises by the asking price per square metre (psm).

    Working example

    A 50m2 office space costs $350 per month, or $1,458.33 a month, or $17,500 annually.

    Always keep in mind that additional taxes, such as GST, will be charged on top of rent.

    Some landlords will also provide incentives like free rent or a donation towards furnishing the space. In terms of incentives, landlords frequently operate within a set of margins. When evaluating incentive structures, they will take into account elements like the lease length and rent increases over the course of the agreement.

    2. Security deposits and bank guarantees

    When you sign a commercial lease, the landlord will often ask for a bank guarantee or security deposit. The landlord keeps these deposits as "security" from the renter. If a tenant violates the terms of the lease, the landlord will have the right to "draw down" or "call up" these types of security.

    In commercial situations, a security deposit is typically a monetary bond that may be kept in the agent's trust account or by the landlord.

    A bank or credit union will guarantee the payment of a temporary sum to a landlord under the terms of a bank guarantee. The conditions under which the landlord may "call up" or "draw down" the bank guarantee will be specified in the lease.

    Consider this expense while reviewing your spending plan.

    3. Lease term

    When negotiating a commercial lease, you should always consider the lease term and ensure that the lease length meets your demands and conditions.

    A long-term lease would give some renters the time and stability they need to grow their businesses. Tenants wanting to run a profitable operation that can be sold as an asset should consider signing a long-term lease.

    On the other side, if you sign a long-term lease and your business expands more quickly than anticipated, you can find yourself in a situation where you outgrow a space but your lease term still has a few years left.

    Landlords typically prefer long-term leases from a security perspective.

    Generally speaking, the larger the incentive, the longer the lease (if available). But keep in mind that there will be more rent reviews the longer the lease.

    4. Rent review

    Rent reviews will be included in commercial agreements. Not many landlords will insist on a set rent for the long term.

    Depending on the laws that apply in your state, a rent review may take one of the following forms (or occasionally a mix of them):

    • Consumer Price Index increase;
    • Fixed percentage increase (for example, 3.5% each year); or
    • Market review.

    These price hikes should be accounted for in your budget.

    Working example

    You should expect a rent increase of 20% over the course of the lease if you sign a five-year lease with set increases of 4% annually.

    5. Fit-out

    You should think about if the commercial space you are considering needs to be fitted out.

    If so, you should ask a builder or contractor for an estimate on the cost of the fit-out. When looking at your budget, you should always take the cost of fitting out into account.

    As mentioned in tip one, the landlord may occasionally be willing to help with the price of your fit-out. It is important to keep in mind that these contributions are typically only made after the works have been finished, paid for, and final certificates have been obtained.

    When negotiating the lease, it's important to clarify whether you'll handle your fit-out before the lease commences and is handed over or after. Different landlords approach fit-out periods in different ways.

    6. Permitted use of the premises

    The permissible usage must be specified in the lease. What purpose will you put the space to use?

    Negotiating a wide-ranging approved use is in the tenant's best interest. This will enable future business diversification if necessary and may even provide a sublease arrangement (landlord consent will likely be needed to enter into a sub-lease).

    Any alterations to a lease after it has been signed and declared legally binding might not be feasible without the lease being altered or amended. This may take time and be expensive.

    7. Outgoings

    Negotiate a fixed price or a dollar limit if the landlord passes along the expenses (or operating costs) to you and charges separately for these services. Additionally, ensure the landlord is honest with you and informs you of these costs before signing the lease.

    8. Assignment and sub-leases

    Make sure your lease allows you to sublease a portion of the property or assign the lease.

    For instance, you would require the flexibility to assign the lease to the buyer if you were to sell your company. The lease may also need to be awarded if firm structures change (for instance, shareholdings or reorganisation).

    The landlord's approval is required for all assignments and sublet requests. This method of consent is frequently subject to restrictions.

    9. Alterations and improvements

    The majority of business leases provide that the landlord must approve any alterations or improvements to the tenancy.

    Your lease should have a provision allowing you to make alterations and enhancements to the property. These clauses are typically written with the understanding that the landlord must consent and will not unreasonably withhold that consent.

    10. Make good and refurbishment

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    You should be aware of the "make good" or "give up" condition in your lease at all times.

    The requirement that the tenancy is returned to a vacant shell at the end of the lease is seen in many business leases. What if it wasn't just a shell when you signed the lease?

    Other agreements stipulate that the tenancy must be turned back in the same condition that it was when the lease first began. What if you renewed the lease after ripping out part of the existing fit-out during your fit-out process?

    Redecoration provisions are frequently included in commercial leases. This means that, if requested, you must renovate the rental unit on a specified date or in a particular setting.

    11. First right of refusal

    A first right of refusal clause can be negotiated by tenants into a commercial contract.

    On a case-by-case basis, certain clauses are drafted.

    Working example

    A tenant is considering renting a 350 m2 office space in a building, but they are concerned that if their firm grows, they could require more space. They believe that a vacant 100m2 space next to their current lease could be beneficial for them in the future. In order to force the landlord to present the tenant with this space in the event that the landlord receives a counteroffer, the tenant may incorporate a first right of refusal language into their lease.

    12. Costs

    You should be clear about who is responsible for what during the lease process.

    Legal fees, mortgagee consent charges, and registration fees are a few examples of the expenditures associated with preparing a commercial lease. In some cases, the landlord may charge the renter for the costs associated with creating the lease. You might want to negotiate a clause stating that each party is responsible for its own lease preparation charges.

    *Note that the information above only applies to leases for businesses. Several laws govern retail store leases.

    The dos and don’ts of commercial property investing

    I've spent more than ten years actively investing in real estate and serving as an advisor, so I've seen practically every method there is. From low-risk residential "buy and hold" investments through high-quality "buy and hold" investments all the way up to the complex realm of commercial real estate investment.

    The latter is actually not for the faint of heart. One of the most profitable real estate investments is commercial property, and I've witnessed clients make spectacular capital gains and significant cash flow benefits. However, I've also witnessed the opposite, including two-year vacancies, sharp declines in market value, and people losing everything.

    Simply put, commercial property investment carries a bigger risk than residential property ownership, therefore, it's critical to steer clear of costly blunders for people who are unfamiliar with its complexities or trends.

    Here are some recommendations for investors in commercial real estate.

    Do have a plan

    You must have a plan before investing your hard-earned money or equity in a commercial property. A sound investment strategy will better position you to identify the ideal property when it arises.

    Many business owners make the error of purchasing a property because it appears to be a good deal and then trying to fit it into their plan.

    But seasoned investors don't just have a plan; they also understand how a commercial investment can fit into a portfolio that already exists (typically with a number of residential investments), with a strong emphasis on the long-term strategy, risk management, capital growth, and most importantly, cashflow.

    Don’t believe the hype that you can make money quickly

    I've seen a lot of first-time investors venture into the commercial real estate market, only to have the tenant enter liquidation or receivership months after the contract was signed, leaving the asset unoccupied for months on end.

    Keep in mind that the condition of commercial real estate depends on the lease and the tenant.

    Don’t think you can invest in commercial property single-handedly

    Successful business investors rely on a group of experts to help them. Your team must make up for any knowledge gaps you may have in defining a clear strategy, conducting thorough research, selecting the ideal property at the ideal price under the ideal circumstances, settlement, and property management.

    Don’t overpay

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    Although it may seem clear, inexperienced commercial investors frequently overpay.

    Now, I'm not saying you should just spend $750,000 if the asking price is $750,000. I'm talking about the possibility of paying a price per square metre that is 10% or 20% higher than similar sales just because there is a "long-term tenant" in place earning 8% nett!

    You must be fully aware of the property's comparative values and understand where the value point is. Avoid focusing too much on the cash flow and leasing arrangement.

    Overpaying for a business property will lock up your money more firmly than underpaying for a residential property. Banks are much less likely to offer cashouts or equity releases for commercial investing.

    Do know your property and know the market inside and out.

    When purchasing real estate, exercising caution is quite acceptable.

    Many new investors make a commitment without sufficiently investigating a commercial property. It takes time, resources, and market contacts to make sure you comprehend the entire picture.

    Commercial investing is unquestionably one of the many business disciplines that demands preparation and study.

    Don’t miscalculate cash flow

    Successful commercial investors frequently purchase, hold, and rent out properties for an extended period of time to generate sufficient cash flow for upkeep and other costs. The most astute investors plan their spending so that expenses like the mortgage, taxes, insurance, and advertising charges are adequately covered.

    Your property becomes a burden when you don't have adequate cash flow even if it should be an asset.

    You can tell from the aforementioned dos and don'ts that there are a variety of factors to take into account before making an investment in commercial real estate. But if you know your figures, the benefits might be substantial.

    In theory, all terms of a lease are negotiable. But your negotiating power depends on whether your local rental market is hot or cold. If plenty of commercial space is available, you can probably win many landlord concessions.
    How to negotiate a commercial lease for your retail store: 15 tips
    1. Settle ahead of time on your budget, your must-haves, and your nice-to-haves. ...
    2. Get an agent or lawyer to negotiate for you. ...
    3. Do negotiate on more than one location at the same time. ...
    4. Don't pay asked base rent. ...
    5. Check the square footage yourself.

    Depending on the desirability of the property, levels of interest and current market trends, tenants are often able to negotiate a rent-free period or associated rent incentive (for example, a period where they will pay a “half rent”) in lieu of the fact that they may need to fit out the property.

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