What to look for in a retail lease, and what questions to ask!!

“How much is the rent?” This is usually the first question that someone looking for a retail space or any commercial space, will ask. While that is traditionally the only thing that matters when you are looking for an apartment or home to live in, there are many more variables that go into a retail lease, and “How much is the rent” is often the least important variable in the deal.

So, if you find yourself looking at a new retail space or even office space for your company, here is what you need to be asking, over and above what the rent is.

Firstly, if you are unfamiliar, commercial leases are often advertised in “per Square foot” increments and unless you are in California, the rent will be advertised in an annual fashion. For example, a c class office building here in Columbus OH might be advertised for $10.50/SF and this is an annual number. If the space is 4500 SF you can expect to pay $47,500 annually on your rent. They you divide that by 12 to get your monthly rent. This is true for just about every state other tan Cali in my experience, their rents are so exorbitant that they like to advertise on a PSF basis, but monthly rather than annually.

So now that we have that cleared but let’s talk about what other variables there are.

Well, the first question you need to ask is “what are the estimated NNN expenses” (assuming the lease is NNN, if it’s a gross lease then that should also be advertised and confirmed via LOI). These are the pro rata share of expenses that you the business owner will be paying. It’s a share of the expenses because you are only responsible for the taxes, insurance, and common area maintenance that is attributed to the square footage share of the building that you occupy. In other words, you are only paying for the taxes and insurance that is attributed to the 4500 sf you occupy.

Once that is cleared up you then need to understand what if any TIA or Tenant Improvement Allowance is offered. So, the question you need to ask is “what condition is the suite delivered and is this an “as is” deal?” Meaning that you need to find out what condition the unit is currently in, and how will it be delivered. The economics of a brand-new building that does not have a concrete floor poured yet and is a cold dark shell is a must different deal than a 2nd gen space you are retrofitting. The TIA is meant to be a reimbursement via check or rent abetment for the improvements you as the tenant make to the space to be able to do your business.

So, while one unit may be advertised for $14/SF and is an as is deal, that can potentially be more expensive than a deal that is advertised as $20/SF with $15/SF if TIA that is a new build.

In conclusion, Commercial leasing has many variables and requires more nuance than simply “how much is the rent”?