Leasing Your Commercial Real Estate

There are 3 things you should know before you lease your building.  Click next to discover how to select the right tenants…

1: Selecting the right tenants
2: Types of leases
3: How we find tenants

Selecting the Right Tenants

One of the biggest mistakes landlords make in leasing out their building is being too desperate in the attempt to lease out the building.  When the building sits vacant and there is a mortgage payment coming, it is tempting to lease out the space to whoever would come along.  However, time has proven again and again that it is worth the wait to find the right tenant, because having the wrong tenants can cost you dearly.

In commercial property, the value of your building is directly tied to the income it generates, and the income it generates is directly tied to the lease.  In other words, the lease is the most important document a banker or buyer would look at when he or she determines the value of your building. 

The length of the lease is crucial, because it is an indication of the strength of your cash flow.  For smaller spaces, it is common to see 5-year leases with a 5-year option for renewal.  For larger spaces occupied by big box retailers, it is not uncommon to see 10-to-20-year leases. 

The type of business you lease to is also important.  For instance, you can typically demand higher rents for retail tenants than service businesses such as auto repair shops. 

The size of the space should be taken into consideration as well.  If you have a large space that can only be used by an industrial tenant (when industrial tenants typically demand low rents), you can subdivide the space and lease out each space to smaller industrial tenants, or even office and retail tenants.  Remember, few businesses can afford or need a large space, but lots of businesses need smaller spaces.  By subdividing a large space into smaller spaces, you increase the market of tenants that need your space, which drives up the rent per square foot (or rent per cubic foot in the case of industrial tenants). 

For office buildings in the Central Business District (CBD), parking becomes crucial.  The value of your building and the amount of rent you can collect are tied to the number of parking spaces associated with the lease.  If parking is scarce at your building, you may be able to increase rents (and therefore the value of your building) if it is worth the money to lease a parking garage nearby, convert a building nearby into a parking garage, or invest in a space-saving parking garage device commonly used in Japan. 

The commercial agents at Advantage Commercial Brokers have years of experience leasing out commercial property, and are happy to provide guidance as to the best strategy to lease out your building.

Types of Leases

The type of leases you give as well as the clauses contained can make a significant impact on your cash flow.  Here are some common types of leases:

1. Triple Net (NNN) Lease.  A triple net lease is one where the tenants pay for your operating expenses, such as your taxes and common area maintenance.  For instance, you own a strip mall and charge $28 per square foot + $4.50 per square foot NNN.  If the vacant space were 1,000 square feet, the rent would be calculated as follows: $1,000 square feet * $28 per square foot = $28,000.  This is the rent you collect per year, so on a monthly basis, you would collect $28,000/12 = $2,333 per month.  On top of the base rent, you collect a NNN portion of $4.50 per square foot.  This means you would collect 1,000 square feet * $4.50 per square foot = $4,500 per year, which means you would collect $4,500/12 = $375 per month on NNN.  The total monthly rent you would collect would be $2,333 + $375 = $2,708.  As you can see, the NNN portion of $375 per month pays for your operating expenses.
2. Gross Lease.  In contrast with a triple net lease, the landlord pays for his or her own operating expenses.  In the example above, the rent would simply be $2,333 per month, since there is no NNN portion.  However, since the landlord pays for the operating expenses, you can typically charge a higher rent per square foot. 
3. Percentage Lease.  Percentage leases are common in shopping centers, where the landlord demands a percentage of the revenues of the business as rent.  For instance, you might charge a base rent of $2,000 + 3% of sales over $30,000.  If your tenant generates $29,000 in revenues for the month, the rent would be $2,000.  However, if your tenant generates $40,000 in revenues, you charge 3% of any additional revenues over $30,000 as additional rent.  In this case, the tenant makes $10,000 more than $30,000, which means you get 3% of $10,000 as additional rent, which amounts to $300.  Your rent for the month would be $2,000 + $300 = $2,300. 

In addition to the type of lease you have, the clauses contained can also affect your cash flow.  You may stipulate in the lease that rents will automatically go up by 3% each year.  You may tie the rent increase to a cost of living index, such as the CPI.  Potential tenants may try to negotiate improvements or a month or two of free rent if they sign a long-term lease. 

In commercial leasing, remember that a bad situation on the surface may actually turn out to be good.  Suppose you sign a 5-year lease, and 2 years into the lease, the tenant goes out of business.  You can negotiate a lump sum payment to let the tenant off the hook.  By finding a new tenant who signs a new 5-year lease, you have extended your cash flow by 2 more years starting at the current market rent. 

Another example is the tenant wanting to make improvements.  You can let the tenant know that since the premise is being customized to fit their business, you would want to make their lease longer, which gives you more years of cash flow.  Remember that the lease is a living document.  Just because you have a signed lease does not mean it is set in stone.  Every time the tenant makes a request, you can negotiate to modify the terms of the lease to make the situation more favorable. 

How We Find Tenants

Finding the right tenants for you is an important step that Advantage Commercial Brokers can assist with.  We perform a building and market analysis to recommend the type of tenants you need, and discuss with you the rents you should charge as well as the type of leases and clauses you should consider.

Advantage Commercial Brokers will put up signs, spread the word on the Internet, as well as broadcast your premise available for lease to all the commercial agents in the area.  What makes us unique is that we specialize in selling businesses, and we talk with hundreds of business owners every year, many of which are looking for a space to lease.  Our exclusive database of potential tenants and our diligence to lease out your premise for you make it a clear choice for you to employ our leasing services. 

Your next step is to decide if you want to lease out your premises.  We invite you to do one of two things:

1. Free Leasing Consultation.  Have a confidential meeting with a commercial agent to discuss the best way to lease out your building.  There is no charge for this consultation, and you are not obligated in any way to use our services. 
2. Resource Library. Learn more about leasing commercial property by exploring our resources library.