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How To Lease Commercial Real Estate

Identifying and leasing the most appropriate space to house your business can be arduous and time-consuming. Where should you begin?

In June 2005, Palisades Hudson signed a five-year lease to occupy 1,494 square feet of commercial office space in downtown Fort Lauderdale, Fla. The space acquisition process took 10 months. However, we were able to obtain the right location and amount of space to meet our needs in South Florida for the next five years, while negotiating lease terms favorable to us and to the landlord. We were able to accomplish this while minimizing the time we dedicated to the process, so we could continue to concentrate on serving our clients.

Planning is imperative in the space acquisition process. If you are currently leasing commercial space, begin planning at least 12 months before your existing lease expires. If you will need the facility to be constructed to suit your needs, you may want to begin the process 18 months in advance. Many small business owners tend to wait until their current leases are about to expire before looking for new space, which limits their leverage in negotiating the terms of the new lease and may mean settling for space that does not meet their needs.

Here are the steps in a well-organized, efficient approach to finding and leasing the best commercial space for your business:

  1. Determine your space requirements and business needs.
  2. Survey the commercial real estate market.
  3. Identify available space that meets your criteria.
  4. Tour the properties identified in Step 3.
  5. Submit request for proposals (RFPs) to prospective landlords, review landlord proposals and submit counterproposals.
  6. Select the space that comes closest to meeting your needs and negotiate final lease terms.
  7. Construct a customized interior space, if necessary.
  8. Take occupancy.

Most businesses will put together a team of employees, often aided by a broker, to tackle this project. In a very small business, of course, the owner might have to go it alone or with only a broker’s assistance.

The first step is to determine your space requirements and analyze the needs of your business. Address where your business is now, where it is headed and how you intend it to get there. Consider the financial resources and revenue forecast for the business to ensure that you will be able to handle the anticipated rent for the desired space while paying yourself and your staff, covering other overhead costs and marketing your business. In addition, determine how important certain building attributes such as location, image, services and amenities are to your business; the proximity to major highways and train or bus stations if your business will be in a metropolitan area, so the office is easily accessible for employees and customers; the proximity to restaurants or other outlets so employees have lunch options; and the maximum lease term and cost to which you are willing to commit.

Once you have addressed those issues, determine the amount and nature of the space you will require. This includes identifying the size of the offices and open areas, the size of common areas (conference, break and storage rooms) and any computer room requirements. Also, be certain that you and your landlord are speaking the same language. Depending upon the approach you take, you may calculate your needs on a “net square footage” or “usable square footage” basis. (See accompanying story on Page 4.) Landlords typically will quote you the “rentable square footage,” which is a larger number. You need to know the rentable square footage because this is the basis for computing your monthly rent, but you also may need to obtain some of the other figures.

Size Does Make A Difference

Four terms are used in commercial real estate to describe square footage:

Net square footage (S.F.) is the space required for a function or staff position.

Circulation factor is the interior space required for internal office circulation that is not accounted for in net square footage. A circulation factor of 1.35 times net square footage is typically used for office and fixed drywall areas, while a factor of 1.45 times S.F. is used for open-area workstations.

Usable square footage is the area contained within the demising walls of the tenant space, determined by multiplying net square footage by the circulation factor.

Demising walls separate the premises of adjacent tenants.

Rentable square footage is the usable square footage times the pro-rata share of the building’s common areas, such as lobbies, public corridors and restrooms. The rentable/usable (R/U) factor will typically fall within the range of 1.10 for a full-floor occupancy to 1.16 for a partial- floor occupancy, depending on the building.

Now you can begin to investigate the commercial property market in which you intend to lease your space. If you are very familiar with the relevant properties in the area, you may decide to search on your own. If you are very knowledgeable about leasing commercial real estate but are unfamiliar with the market, you may hire any broker to obtain access to the Multiple Listing Service (MLS) database and have the broker function solely as a tour guide. However, if you are unfamiliar with the area and with leasing commercial property, you may want to seek the services of a knowledgeable broker that you can hire on an exclusive or non-exclusive basis. If you use an exclusive broker, you will be making that broker your sole representative in the market for a period of time, such as 90 days. That broker will be entitled to a commission even if you ultimately sign a lease for space you identify on your own. Anon-exclusive broker will only be paid a commission if you lease space to which that broker introduced you. While the landlord usually is responsible for the commission, that cost will be built into the rent the landlord demands for the use of the space.

Another advantage of working with a local broker is that the broker may have access to new or sublease listings that do not appear on the MLS database. You or your team next will want to survey the market to identify available space that meets your criteria. Now it is time to start touring those properties. Each person should take good notes and document the important aspects of each location you tour. You may need to see so many properties in the course of your search that it becomes difficult to distinguish one location from another merely by memory. During your tour, try to meet each building’s property manager, because he or she will be your primary contact with the landlord once you take possession of the leased space. Also request a preliminary space plan for each building, which provides a sketch of the layout. Once you have completed your tour, compare notes and evaluate the space plans to identify the three or four buildings that come closest to meeting your vision of an ideal commercial space.

The next stage is to submit a request for proposal to the landlord of each building in contention. The RFP, which is the first formal written communication you will have with your future landlord, should be customized to address your needs. List possible deal-breakers toward the front of the document. If any landlords are unable to meet these requirements, you will be able to eliminate them from your list of contenders. When Palisades Hudson drafted the RFPs for the South Florida office search, our list of deal-breakers included the requirement that air-conditioning be available when our staff needs to work in the late evening or on weekends. The RFP also should include items that you would like to have, but that would not necessarily be deal-breakers. Such requests may include a period of free rent that would commence at lease inception. The landlord’s willingness to grant such requests typically will depend largely on the lease term, the size of the space you intend to lease and, most of all, the condition of the commercial real estate market in the area.

An RFP is merely a solicitation of a proposal from the landlord. The document should make clear that both the RFP and any initial response by the landlord are non-binding. You should submit RFPs to all of the buildings in contention at the same time. Besides serving as your wish list, the RFPs provide the opportunity to obtain market knowledge from the landlords’ responses. The RFPs also create competition among the landlords, which is always good for the tenant.

You likely will receive responses from the landlords within a couple of weeks of submitting the RFPs. Typically, the responses will address only the basic proposal issues such as the lease term, base rent, size of the space, tenant improvements, parking, amenities surrounding the property and property management. You or your broker should keep track of any requests that went unanswered in the landlords’ responses and raise these points in your counterproposals to ensure that all of your requests have been addressed. Before drafting your counterproposals, review each landlord’s standard lease form. Identify any troubling lease clauses and any language in the boilerplate form that differs from the landlord’s proposal so you can address these issues in your response.

If you intend the space to be built to your specifications, the landlord will provide you with a tenant improvement (TI) allowance. The allowance is a fixed amount of money that the landlord essentially lends to the tenant for any improvements to the space. The tenant repays the TI allowance over the term of the lease in the form of rent. You will be responsible for covering any improvement costs that exceed the allowance. Review the TI allowance letter, or work letter, closely because it will contain only an estimate of the improvement costs when you are signing the lease. The landlord prepares the estimate and will be in control of the improvement process, so it will be to the landlord’s advantage to keep the estimate as low as possible. The landlord will assemble a design and construction team to prepare a final space plan and bid out the construction work. If the space was previously occupied and you are taking it as-is, you may have more leverage when negotiating the base rent and other lease terms, since the landlord will not need to provide you with a TI allowance.

At this point, you should be able to determine which property comes closest to your ideal commercial space. Notify the landlord of the building you have selected that he or she can secure the lease under certain conditions, the majority of which will have already been defined during the RFP and counterproposal stages of the negotiation. As a courtesy, contact the owners of the other contending buildings to inform them that you plan to pursue a lease with another building. There is always a possibility that final negotiations may fall through with your first choice.

Once you have signed the lease, you can move in your furniture and equipment, place your signage on the front door and return your attention to growing your business. Just think: If all goes well and your projection of the business’s growth was accurate, you will not need to revisit this lengthy process until 12 to 18 months before the end of your current lease term.

Managing Vice President Shomari D. Hearn, based in our Fort Lauderdale, Florida headquarters, contributed several chapters to our firm’s book, Looking Ahead: Life, Family, Wealth and Business After 55, including Chapter 2, “Relationships with Adult Children;” Chapter 9, “Life Insurance;” and Chapter 17, “Retiring Abroad.”

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