Whether you have a new, growing or just changing business, finding the right commercial space and negotiating good lease is essential to your long-term success. Even if you have done it before, this could be a good refresher guide for what to expect when you set out to find a new home for your business. If you haven’t, this is some valuable information that will help you understand the journey you’re about to embark upon.
THE BASICS – WHAT IS NNN?
There are three basic rate structures that you will find when hunting for commercial properties in Colorado Springs.
1. Gross Rent: This means the rate you see will include everything from the property taxes, insurance, landscaping and snowplowing to your utilities. You pay a flat rate for everything (with the likely exception of phone and Internet).
2. Modified Gross Rent: Modified gross rent will include everything but utilities, which you will need to put in your own name and pay separately. Some Colorado Springs brokers say their rent is “modified gross,” but still charge a common area maintenance fee. It’s important to ask what is included and not included in the rate.
3. NNN: NNN rent is the most common type of rent for Colorado Springs commercial properties. In this structure, there will be two elements to your monthly rent. The first will be the base rent, which is what you’re paying for the space. That is fixed and predetermined by the lease. The second element will be the NNN. This includes the cost of the property owner’s property taxes and insurance as well as maintenance and management. It can fluctuate based on real costs.
NNN charges range dramatically. They can be less than $2 per square foot in older properties with lower taxes and less overhead to more than $9 per square foot in some new properties.
In office properties, the NNN typically includes all utilities (excepting phone and Internet), and often includes janitorial services inside the space. For retail spaces, the NNN does not typically include any utilities other than those used in the common areas. Industrial spaces are often charged at modified gross rent, but are increasingly coming with separate NNN charges, which will not include utilities, but which should certainly be under $3 per square foot.
HOW IS COMMERCIAL RENT CALCULATED?
Start by talking with a lender. Find out how much you can afford and then step back and think about what you want to pay in order to feel comfortable with the financial commitment. Use that number as your ceiling.
Ask your lender about these things:
Second step – Find the house
Most commercial properties in Colorado Springs are advertised with rates per square foot. The rates are almost always quoted per year. In order to figure out what your monthly rent will cost, add the base rent and NNN figure before multiplying it by the square footage of the space you want to rent. Then divide that figure by 12.
1,200 square feet at $8 per square foot plus $2 NNN
= $10 per square foot X 1,200 square feet
= $12,000 per year
Divided by 12
= $1,000 per month in rent.
WHAT’S NEGOTIATABLE IN A COMMERCIAL LEASE?
The answer here is simple, yet overwhelming – Everything is negotiable. Do you have to break a lease somewhere else? Do you need time to get established? You can ask for free rent in the beginning.
Did you have a bad experience with a competitor moving in next door at your last location, try for an exclusivity clause for your use in the center.
Don’t like the price? Ask for a discount.
The tricky thing about negotiating a lease is thinking ahead to the different ways you can protect your business in the future. That’s why it’s always wise to hire a tenant representative – a broker who represents you and your best interests in negotiations. A tenant rep will know market rates and the difference between asking and actual rates as well as common lease elements designed to protect you and your business.
OTHER THINGS THAT ARE DIFFERENT ABOUT COMMERCIAL LEASES
A commercial lease is very different from a residential lease in many, many ways. Beyond the way the prices are advertised, they are going to be foreign in almost every way possible to someone who hasn’t negotiated one before. Here are a few things to know about commercial leases:
1. The term of a commercial lease is usually multiple years. It’s rare that landlords allow tenants to sign a one-year lease, especially in higher-end properties. And a longer lease can often be better for the tenant as well. A typical minimum term is five years. And leases longer than 20 years are not unheard of. Some landlords will work with three-year leases, especially for start-ups.
2. Rates go up within the term. If you were to sign a two-year lease for an apartment, you’d expect to be locking the rate in for the entire term. In commercial leases, rates usually go up every year even in 5-year or longer leases. Right now 3% annual increases are common in Colorado Springs..
3. You can make changes to the space. It’s rare that a commercial space is already perfect. You can make changes and/or you can ask the landlord to make changes for you. This is where the longer term is key. If you or the landlord invests in changes to the space specifically for your business, the changes only pay off if you’re there long term.
4. The landlord will require a look at your finances. Except in rare cases of strong national credit tenants with big corporate books, landlords will usually require a personal guarantee. So, while the lease is in your business’s name, you’re still on the hook personally for paying the rent.
Just as you provide your social security number and proof of employment to prove ability and likeliness to pay for a residential lease, a commercial landlord will require assurances. They will typically ask you to provide a financial statement, which will show your cash on hand and assets. They want to know you have reserves in case you get off to a rocky start or fall on hard times. They will also usually look at tax returns (personal and business) to see your income.
It can seem intrusive, but the landlords need some way to measure the risk they’re taking in leasing space to you, especially if they are going to put money into the space.
Once you find a space you like, your tenant rep (if you are working with one) will prepare a Letter of Intent detailing the terms you want. The letter should include everything from modifications to the space, to rental rate, term length and special requests and requirements. The letter is nonbinding and should simply be your wish list on paper.
The landlord or landlord’s broker will provide a response. It’s rare that what you want will perfectly align with what the landlord is willing to give. But the letter will volley back and forth until you agree on terms.
Once the letter is finalized, you’ll have a lease to review. It’s definitely worth the money to have an attorney look it over for you. Leases are always written to the benefit of the landlord – some more than others. You can’t reverse that, but you can even it out to some degree.
Once the lease is signed and the landlord turns the space over to you – get ready to open your doors!
Contact me if you have any questions
There’s so much more that happens between the lines. I will make sure you understand what’s happening as we go.