This is the first in a three-part series on leasing commercial property or space.

DISCLAIMER: This article is not intended to constitute legal advice. The author is not an attorney. Legal counsel should be sought out for answers to specific legal questions, or advice on specific circumstances.
There are 23 issues I look at, as a Realtor, to make sure the tenants I represent are well protected when signing a commercial lease. Unlike residential leases, which have many protections mandated by the Florida Real Estate Commission, commercial leases come in all shapes and sizes, and it's "tenant beware". They do, however, contain a number of common clauses, your knowledge of which could save you thousands and keep you out of a potentially business-ending situation.
Take for example the restaurant that leased 5,000 SF of frontage for 5 years on a busy artery. The high traffic counts were great, until they learned that the city was about to embark on a year- long road widening project in the third year of their lease.
A commercial lease can put you on the proverbial hook, often personally, for tens of thousands of dollars and for 3 or more years, not to mention the potential loss of livelihood in the event that something goes afoul with your lease, which affects the longevity of the business you’re putting in it.
What kind of lease are you entering into? Is it a gross lease, percentage lease, triple-net lease?
What, exactly, are you paying for?
“The high traffic counts were great, until they learned that the city was about to embark on a year-long road widening project in the third year of their lease.”
Let’s take a look at a typical commercial lease, based on the key clauses found in such a lease.
LEASED PREMISES
How much space are you leasing and how do you know you’re getting what you’re paying for?
It is often beneficial to include language identifying the percentage, to the 7th decimal point, of the total building or project represented by the “Approximate Square Feet” being leased. This helps clarify the calculation of your portion of operating expenses and other proportionate charges.
If your rent is defined as a dollar amount per square foot, it may be wise to insert language that gives you the right, but not the obligation, to independently verify and confirm the “usable” square footage measurements of the space to be occupied. Often, the square footage in a lease is an approximate number based on architectural plans, not actual, post-buildout measurements. It may be necessary to specify that the final rent will be adjusted, should the actual measurement differ from what is stated.
This may seem picky, but a mere 10 SF difference in a 5-year lease at $24 per SF equals $1,200 over the term of the lease.
SECURITY DEPOSITS
How much? What are the requirements to get your deposit back?
Depending on your credit-worthiness, security deposits can be eliminated, or at least significantly reduced. However, beware that, especially if your business does not have a long track record and its own credit history, you may be putting yourself on the hook as guarantor. Should something happen, say, in year two of your operation (e.g. divorce, or other extenuating circumstance) that causes your business to cease operations, you may be personally liable for the remaining years of the lease.
When a security deposit is required, some tenants request that it be held in an interest bearing account.
It is important to consider the financial stability of the landlord. In the event of an unstable landlord experiencing financial difficulties, a lost security deposit may be the least of your worries.
There are alternate forms of security deposit that may be considered. These include a letter os credit secured by a Certificate of Deposit or a line of credit. However, using a line of credit is the least favorable means of securing the letter, as it often must be renewed annually.
Remember, when using a 3rd-party guarantor (relative, investor, business partner, etc.), any modifications to the lease must be approved by the guarantor.
PERMITTED USE
It is very important to know that your business can be conducted normally under the permitted use of the leased premises. I have seen leases signed underwhich every aspect of the tenants business does not fit into the permitted use of the premises.
You may also want to be aware of whether you are limited by the intended use in the event your business requirements change, or you need to sub-lease.
BASE RENT
If you’ve investigated the market in which you are leasing, you have likely realized that it is the “effective” or average rent paid that is used for comparison shopping. As a real estate professional, I use my analytics software to review current asking price for rents, as well as current recently leased properties. As we know, what a landlord is asking, and what a space ends up leasing for are typically two different prices.
Pay attention to any increase in the base rent tied to the Consumer Price Index (CPI), as there is no direct relation between market rents, or the landlord’s expected ROI, and the CPI, which represents inflation.
In the event there is a contribution by the landlord toward the operating expenses (“Dollar Stop”), you will want to look for any percentage base rent increase to correlate with an increase in the Dollar Stop or landlord’s expense contribution.
If your business is of a retail nature, you may be looking at percentage leases for store frontage. In this case, your rent will fluctuate with sales and you will want to clearly define how that amount is determined.
OPERATING EXPENSES & ESCALATION CLAUSES
With regard to expenses for normal operations of the property and common areas, it is important to determine whether the lease is a “pass-through” (typically referred to as “triple-net”), or whether the landlord will contribute to a portion (“Dollar Stop”) of the expenses, or whether all expenses are absorbed by the landlord (“Gross Lease”).
In the case any of these types of leases, it is helpful to also compare the history of the property your are intending on leasing, as well as compare other similar properties, to ensure that the expenses are not inordinately high. This is a normal part of my research, as a Commercial Realtor.
For a Dollar Stop, you will not only want to be aware of what the landlord’s maximum contribution will be, but also what the operating expenses typically are for the property, so that there are no surprises.
With a Gross Lease, it may behoove you to determine what percentage of the total lease amount covers the expenses. Otherwise, it is difficult to make an apples-to-apples comparison with other properties.
For a NNN (triple-net) lease, all taxes and operating expenses will pass through to you, as the tenant. These are typically assessed as an additional NNN fee on top of the lease, which will increase annually. You will also, however, want to be aware of any potential capital improvements or tax increases that may be forthcoming. You may also want to look at whether any reductions are passed through.
This brings us to Escalation Clauses, which define how future increases in operating (and capital) expenses will be addressed.
It is important to know whether the expenses are based on full occupancy of the building and other factors, which may cause unforeseen increases over time. This is especially the case with utilities such as electricity for common areas.
You should also be aware of how capital improvements are to be handled. Sometimes, capital improvements provide an ongoing saving in operating expenses (e.g. lower electric bills). Some leases incorporate capital improvements into operating expenses by straight-line amortization, while others allow capital expenses below a certain amount to be treated as expenses.
Tenants frequently ask for a number of exclusions to operating expenses. The most common are to many to be listed in this article, but here is a short list of them:
Costs for which the Landlord is reimbursable or indemnified.
Salaries of Landlord’s executive personnel (e.g. property manager level and above) and overhead and administrative costs not directly related to the operation and maintenance of the building;
Capital expenditures and major structural repairs and replacements;
Replacement of any item covered under warranty;
Any interest, fines or penalties including late payment penalties incurred by the landlord;
Personal property taxes of Landlord for equipment or items not used directly in the operation or maintenance of the building;
Cost of overtime or other expense to Landlord in performing work expressly provided in the Lease, unless reasonably necessary and/or customary in the operation of similar properties;
Expenses directly resulting from the negligence of Landlord, its agents, servants or other employees;
Costs to generate rental and other income:
Advertising and leasing commissions
Legal fees for negotiating and enforcing tenant leases
Space planning and costs to prepare space for new tenants
Repair and reconstruction of casualty damage, whether or not covered by insurance and whether or not subject to insurance deductibles.
In the coming articles of this series, we will cover repairs/improvements, liability, assignment/sub-leasing, insurance, late charges, and several other crucial aspects of commercial leases from a tenants perspective.
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