What Landlords Typically Require When Signing a Commercial Lease
If you are looking to secure your first location for your business there are a few things that you should be prepped for prior to beginning your search. Each Landlord is different; some are easier to deal with then others when it comes to negotiating and welcoming a tenant. I have found that if you follow the steps outlined below it will help the process go smoother for both parties.
1. Know your business plan: If your a start up business and you are looking to occupy the space be prepared to present a formal business plan to the Landlord. When you sign a lease, you're signing a business agreement, the Landlord will want to see your plan and how you are planning to budget the rent throughout the term of your lease. Make sure the business plan is thorough and precise.
2. Terms to Expect: Unlike residential rental properties, the average length of the terms that Landlord's like to see is a minimum of 3-5 years. There is a few different reasons behind this length.
- If the asset you are occupying space in is a investment asset for the Landlord the value of the property will be greater with longer lease terms as it will pose less risk of vacancy for the real estate investor purchasing the property.
- If the Landlord is having to perform a large amount of TI's (Tenant Improvements) to build the space out to your liking, then the Landlord will want to amortize that cost over the term.
- If the asset your are occupying is a long term holding for the Landlord they want predictability in their investment. They don't want to fill a vacancy and worry about it being vacant again in 6 months or a year.
3. Financials: In short, the Landlord wants to see that you (the tenant) will be able to cover the rent and stay in business. If you are an existing business the Landlord will typically ask for 2 years of tax returns and P&Ls. If you are a start up, the Landlord will ask to run a credit check and will want to see a personal bank statement from the individual signing the lease. The Landlord wants to make sure that the rent will be paid and you won't struggle and fail.
4. Personal Guarantee: A personal guarantee is a legal document that is signed by an individual that guarantees the rent will be paid. Some, not all Landlords will want a personal guarantee from at lease one individual within the entity. This is to give the owner reassurance that the tenant is not going to walk out on the lease. Having a signed guarantee from the tenant gives the Landlord power to penalize the tenant more severely if the tenant were to break the lease.
These are a few of the topics that typically take the tenant by surprise when occupying the space. As I stated earlier in the post, every Landlord is different, so make sure to get with the listing broker to see what their particular Landlord requires from prospects.
I hope this article brings you some knowledge and guidance when looking to occupy commercial space.
If I failed to mention something, please mention it in the comment section.
If you have any questions or concerns please let me know.
Have a great week.
Clayton King
505-263-8531
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