If you are at the point where you are ready to sign a retail lease contract let us first say congratulations. Actually finding the retail space is part one of a process that can at times be quite cumbersome. What is step-two? Well, if you are reading this article you will know it is entering into a legally binding lease agreement. When securing your retail space for lease, you no doubt want to ensure you get the best deal possible.
How do you do that? We are here to help…but it comes with a disclaimer. The information listed below is to provide you with a better understanding of the retail leasing process. We still encourage that you always use a licensed commercial real estate Broker to perform any transaction. Good luck out there!
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Retail Space For Lease: Basic Terms
While every lease is different, there are basic terms and structures associated with most, if not all, retail leases. We outline these below.Lease Structure
There are several types of lease structures in commercial real estate (Modified Gross, Single Net, Double Net). If you are signing a retail lease, you will most likely be using a Triple Net lease or a Percentage lease.
Triple Net
What is it? Triple Net (NNN) Lease is defined as a lease structure where the tenant is responsible for paying all operating expenses associated with a property. In at Triple Net (NNN) lease structure a tenant is charged monthly, in addition to rent, for three expenses (get the triple now?) – taxes, insurance and common area maintenance. This lease structure allows the landlord to pass off their variable costs on to you, the tenant. Typically these charges will be an extra 10% to 35% added to your negotiated rental rate.
Rental rate in a Triple Net lease is calculated per square foot. While rates vary by property and market, for retail space for lease you will encounter prices anywhere from $.90 to $3 per square foot. Prices depend on retail space for lease location, asset class and property amenities.
Percentage Lease
A percentage lease is structured as a tenant paying a base rent plus a percentage of revenue earned while doing business in the retail space they are leasing. This type of lease can be beneficial to a tenant as it often times leads to a lower base rental rate than they would find in a Triple Net lease. It can be beneficial to a landlord as there is ample opportunity to make a lot of money off a tenant whose business is performing well.
Lease Length
An average retail lease runs 1 to 5 years in duration, with the middle ground being 3 years. Typically the longer the lease the more room for negotiation as a landlord will be more willing to work with you if you are sticking around for a little bit.
Tenant Obligations
Obligations, this is your least favorite part…meaning what you pay each month for your retail space
In a Triple-Net Lease…
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Rent
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Insurance
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Property Taxes
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Common Area Maintenance
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Utilities
In a Percentage Lease…
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Base Rent
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A fixed percentage of your monthly income
The Counter-Offer For Your Retail Lease
Once you have decided on retail space and put in an offer, the landlord’s Broker will send you a contract for lease. Always consider this a first draft as there are many items contained in that lease that you can negotiate.The easier provisions in a retail lease that you can negotiate on are:
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Decreasing basic rates
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Lease terms (shorter or longer)
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Free rent. Dependent upon market conditions this could be anywhere from 1 to 6 months.
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A smaller percentage of revenue in a Percentage Lease
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Increased tenant improvement, or finish-out, allowances
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Graduated lease rates. These rates start low, but increase over term of lease.
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Establishing limits on Triple Net (NNN) charges
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Including certain utilities in the base rental rate. Typically water and sewer are included but you can attempt to negotiate for gas, electricity, and trash removal.
Include all, or several of these in your proposal. You’re unlikely to succeed with them all, but it will establish a good position from which to negotiate. It will also help you check the willingness of the lessors to engage in meaningful negotiations.
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Clauses:
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Escape clauses: Help you get out of the lease in specific circumstance.
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Sublease clauses: Providing you an option to lease out your space to another tenant.
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Exclusivity clauses: Prevents a landlord from leasing space on the property to a direct competitor.
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Co-Tenancy clauses: Allows you to break a lease if an anchor tenant at your property leaves and the landlord can’t replace them within a certain timeframe.
Ensuring the Best Deal For Your Retail Lease
As we stated at the start of this article, if you have found your retail space and are ready to sign a retail lease ALWAYS USE A PROFESSIONAL. A licensed, experienced Commercial Broker knows the in’s and out’s of a retail lease. They can best negotiate, analyze and execute a legally binding agreement. If you have found retail space for lease, or are beginning your search, reach out to one of our Retail Brokers to ensure that you get the most return on your substantial investment.
Sources Entrepreneur FitSmallBusiness
Percival Partners is one of Charlotte’s most recognized and respected commercial real estate firms with more than 50 years experience in the region. Our professional and experienced real estate Advisors are in the business of listening, understanding, and adding value. No matter the commercial property type you own or seek, you can count on the Percival Partners team to maximize your return and peace of mind. To reach us, you can call us at 704.632.1000 or follow us at @SVNPercival, LinkedIn or Facebook.
