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5 Things You Should Do Before Leasing Your Commercial Property
Let’s face it, leasing a commercial property is probably one of the biggest investment decisions a business owner has to make. A commercial lease can be complex and fraught with potential snags. If you haven’t rented a commercial property before, or have had an awful experience with your previous tenants, it is crucial to ensure that the person moving into your property is abiding by the rules set out in your tenancy agreement.
So, in order to reap prodigious financial rewards from your commercial investment, here are a few things that you need to do:
Ask certain questions
Before you begin, you should ask yourself the following questions:
- Is the property ready to be rented?
- Who am I planning to lease to?
- How much and how long am I letting the property for?
- Should I do a background check on all my prospective tenants?
- Is there a need to hire a support team (including an electrician, landscaper, contractor, cleaner, and solicitor) beforehand?
- Should I allow the lease to be renewed?
- Do I have the right lease agreement based on my property type?
Research the market
Being a commercial property owner, it is vital to know every single thing about the real estate market before leasing your space. Research a bit and figure out what is the vacancy rate for commercial properties in your area and region. Remember, not all commercial properties will have the same vacancy rates and lease costs per area. Thus, it’s best to perform a market analysis in order to determine the best, most realistic listing price for your rental property.
Set the terms of the lease
Decide on the commercial terms of the lease and draft the same in a legal-binding document called ‘Heads of Agreement’, which is to be signed by yourself and the tenant. The sole purpose of this document is to keep a record of the proposed terms of the lease agreed by both parties. Once agreed and signed by both the property owner and the tenant, there won’t be any alterations to the lease in the future.
Prepare and understand the lease
It is necessary to hire a lawyer with considerable experience while preparing the lease to make sure the deal is executed smoothly. When drafting the lease, always consult:
- Your financier if there’s a mortgage over the property;
- Your architect if any building work is required;
- And, your property agent to ensure that the commercial terms comprised in documents are appropriate.
The type of lease you choose for your commercial property and the clauses it contains can have a significant impact on your cash flow. Generally, there are three different types of commercial real estate leases, as mentioned below:
Triple Net (NNN) Lease: According to this lease agreement, the tenant or lessee pays all real estate taxes, operating expenses, building insurance, and maintenance costs on the property, along with any normal fees that are expected under the agreement (rent, utilities, etc.) It cannot be modified based on the tenant’s requirement.
Gross Lease: Unlike Triple Net Lease, a gross lease can be altered to meet the needs of a particular building’s tenants. In this lease, the landlord pays all real estate taxes, insurance, and maintenance costs. This type of lease is mostly used in multi-tenant and single tenant office buildings, industrial, and several retail properties.
Percentage Lease: In this lease type, the lessee pays a standard rent along with a percentage of revenue generated while doing business on the same rental premises. This type of lease is commonly executed in retail mall outlets.
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Note: the location and nature of your business can have a big impact on your percentage rent.
A tenant must comply with the lease terms, and in case they don’t, the landlord or lessor can terminate the lease and evict the tenant. The lease is valid for a specific period of time, usually for more than 3 years (including options to renew). No matter whether the tenant is utilizing the rental space or not, or even if they’ve left the premises, it is mandatory for them to pay the rent for the duration of the lease. However, if the initial period ends, the tenant has the right to renew the lease for a specific period.
Select the right tenants
One of the biggest mistakes lessors make is getting too desperate in an attempt to lease out their commercial property hastily. Being a property owner, having the wrong tenants can cost you dearly. Not only they can cost you thousands of dollars while destroying your property’s reputation, but also ruin your peace of mind, thus making your life a complete nightmare.
Always remember, it is worth the wait to find the right tenant, and this is where the services of a commercial real estate agent can be a great help.
Arrow Properties have years of experience leasing out commercial properties and are happy to provide guidance along with numerous top-notch services to help you lease out your commercial property quickly with fewer hassles. For a free consultation, call us @ (909) 377-3137 or drop us an email bb@arrowbcd.com