We left off our lease review after having identified the need to clearly identify the parties and premises while remembering the most important rule of commercial leases, EVERYTHING IS NEGOTIABLE.  

The next section you will encounter in the lease document will most likely be titled "Term".  This is the length of time that makes up your lease, or the amount of time that you have agreed to rent the described space.  Generally, commercial leases run anywhere from 3 to 5 years but can range from as short as 1 month to as long as several decades.  The term you desire will be dependent on the present condition of your business and your future projections. 

Most leases in this section will also outline a basic renewal plan, "tenant may renew once for an additional 5 years", which may or may not include a method for calculating a rental rate during the renewal period. In any situation, the initial described period will be called the "primary term" and the renewal periods will be called the "secondary terms" (you may also see primary period or secondary period). This would be the proper language to use when discussing your lease with the landlord, "I noticed that in the third year of the primary term my base rent goes up by 15%, why?"

Lease terms may start at any time of the month or year you would like; so pick dates that coincide with an advantageous time of your year.  Calendar year and fiscal years are the most commonly used time frames used in commercial leases.  A calendar year is just a 12 month period starting in January and ending in December.  A fiscal year is any 12 month period that works best for the accounting needs of your business; April to March, October to September, so find a term that works for you.

Make sure you understand the term of your lease as this will be the length of your agreement and a main schedule for adjustments of rents and expenses.

The next section that you will most likely encounter in your lease is a description of the rental rate.  There are several ways that this number can be expressed; annually, monthly, or as a total amount. In the examples below we are only discussing the base rent. The base rent is the minimum rental amount for the leased space; it does not include expenses, additional rent or any pass throughs.  We will discuss these later, but for now, the base rent.

In the industry, the rental rate is most often expressed in an annual rate per square foot; i.e. $12/sf.  What this means is that the tenant will pay a total annual base rent of $12 for each foot of the leased space. Ex: a 1000 sf space equals $12,000 total annual base rent.

Sometimes the rent is expressed in a monthly bases, $1/sf. As the name implies, each month you will pay $1 for each square foot of the leased space.  Ex: 1000 sf equals $1000 base rent per month.  You may have noticed that the the way to calculate the annual base rent into a monthly figure is to divide the annual base rent by 12. The two examples above are the same, they are just expressed in different units, annual versus monthly.

The last method seen in leases is to just describe a monthly base rent number. Ex: Your rent is $998.50. This is not usually preferred as it lends itself to some manipulation and the development of this number may in no way be connected to the market.   This is often seen in leases drawn up by individuals not practicing in the commercial real estate field and should be  a red flag to look for other areas of concern in the lease.  Always break the figures down into an annual and monthly number before signing a lease which simply states the total rent due.

The manner in which the rent is described means little if you are not familiar with current market rates. I often see naive tenants sign a lease thinking that they are getting a great deal when in fact they are several dollars or more above market rates.   If you are unfamiliar with market rates contact your local commercial broker, in lease transactions  such as this the tenant representation services are free so you lose nothing and gain the advantage of experience and market knowledge.  

Most modern commercial leases will include sections which will attempt to a) recover expenses extended by the landlord at the building, and b) create a profit making center.  Be very careful of this section and make efforts to reduce/restrict it as much as possible.  Items you will often see in this section are insurance, taxes, common area maintenance, capital expenditures or improvements, property management fees, support staff fees, security fees, landscaping, general building maintenance, office management fees, building advertisement fees, and others; it can get exhaustive so be mindful of them all. 

The inclusion of additional rent can be a very tricky situation as it is one of the key places where extraordinary efforts to obtain  reasonable rent and concessions can be blown away if not properly examined.  I do not think it is necessary for a landlord to bear all expenses however, some will try to pass through an entire slew of expenses which are more properly categorized as landlord/developer business costs.  The tenant has paid the base rent and should contribute to the upkeep of the building and/or costs associated with their presence in the building  but beyond these points every Landlord desired expense or additional rent request should be reviewed and negotiated.  Again, remember our rule, everything in a commercial lease is negotiable.    

(This is the second of several articles which are a compilation shorter posts discussing common commercial lease sections.)