Questions About Renting My 1st Commercial Property

Matt Morel · 2016-06-29T20:06:51-07:00

Hey guys! I want to start by saying that I hope I posted this in the right area. Well here's what I have for ya:A buddy and I are looking to open the doors of our small business in spring/early summer of next year. Both of us are 25, and this is the first business either of us have ever done. With that being said, neither of us have any experience and have no idea what to expect with renting a commercial space. Are there any specific things I should look for, ask for, or expect?I'm sure expenses such as renovations, utilities, etc.. will vary from place to place and landlord to landlord, but here are my biggest areas of concern:- Renovations: If we will have to hire a licensed and insured contractor to do renovations/remodels for us to fit our business' needs. This will get pricey quick if so. Both of us have dads and friends who are very handy, and have been in construction related careers for a long time, but they aren't contractors. If we could use them, it could save us big time* Are there any instances where the landlord should help with the cost of renovations? * Are the tenants usually expected to return the property to its original appearance upon move-out? - What are the standard requirements for renting a commercial space? Do we need business credentials? A business track record? Show them our revenue projections?Those are all of the areas of concern I can think about at the moment. I'm sure more will come, and I will update this post as they do! Any input that you commercial landlord/tenants can share with me about your experiences and what to expect/look out for would be greatly appreciated!Thanks!

Martin Z.

Glendale, CA · Member since 2013 · 303 posts · 67 votes

10y

"Are there any instances where the landlord should help with the cost of renovations"--- With what you stated, most will not give you any up front funds, you should focus more on trying to secure a descent lease rate.

"* Are the tenants usually expected to return the property to its original appearance upon move-out?" --- Yes

"- What are the standard requirements for renting a commercial space? Do we need business credentials? A business track record? Show them our revenue projections?" ---

Expect to hand over tax returns, credit reports, personally guarantee the lease, etc. They may ask for an increased deposit if you don't have any background in your business.

Leasing commercial is not like leasing an apt or home. Most of the time and depending on the lease, you are responsible for almost every cost associated with your occupancy.

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Matt Morel

OP

Boise, ID · Member since 2012 · 3 posts · 0 votes

10y

Thanks for the response!

What you told me is basically what I was expecting to hear. It's a pretty big bummer deal that we may have to un-renovate the place upon move-out, since our upgrades are going to make the place look awesome!

As for everything else, Hopefully our opening date and our ability to find our few employees will align well, and give us plenty of time to be picky with the place we choose. Best case scenario, we find a nice place with a landlord who is extremely motivated to fill the space!

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Scott Patterson

Westlake Village, CA · Member since 2016 · 11 posts · 5 votes

10y

Hi Matt,

I'm a commercial broker in Southern California and I handle leases very often. If I were helping you find a spot and you came to me with these questions, I would first ask what type of business you are embarking on. The type of business dictates the type of property you will be in and the type of property you sign a lease for has different standards for tenant improvements, security deposit, minimum lease term, etc.

I can answer for us locally here in So Cal but there may be different standards for landlords in Boise. Nonetheless:

"Are there any instances where the landlord should help with the cost of renovations?"

Absolutely yes. Depending on the local market, landlords typically offer certain concessions. Concessions could be: lower base rental rate, credit toward tenant improvements, or free or half rent for one or more months. The landlord will be more likely to make concessions if you sign a long lease term. For example: You may ask for a significant tenant improvement allowance or credit in lieu of free rent during the term. If you wanted a couple months of free rent, relatively low lease rate, and a relatively short term, expect to be paying for your own TIs.

Having said all of that, I always say to my tenants that I represent: If our first offer gets accepted, we didn't ask for enough. Ask for the best case scenario for you and depending on how desperate the landlord is to have tenants, expect to end up somewhere in the middle.

Long story short... it depends. If the upgrades are truly upgrades, the landlord might prefer that you leave them. This is also relevant to the landlord paying for the tenant improvements because the landlord will be more likely to be willing to pay for your improvements if they add value to many tenants and they can keep the improvements after you move out. Any specific improvements will definitely need to be removed.

Sounds like you're starting your business, so obviously you won't have a business track record. Here in Southern California we have 1% vacancy rates in many industrial markets so landlords can afford to be picky with their new tenants. I have had very qualified clients rejected because the landlord is waiting for somebody to come along with a ridiculous offer.

Because your business will not initially be able to sustain the rent, expect the landlord to ask for a personal guarantee. Tell them your story and hopefully they will buy into your business and trust that you will be successful. The more you can give the landlord, the better. When you submit an offer to lease a space, build the case that you're going to be great tenants.

At the end of the day, landlords only want 2 things:

1. No brain damage from their tenants.

2. Their rent checks.

Keep in mind that if you can prove to the landlord you're going to be a hassle free tenant that always pays rent, you're a dream tenant.

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Dale Shin

Real Estate Agent · Los Angeles, CA · Member since 2014 · 80 posts · 20 votes

10y

Just want to add to Scott's response about when you move out and restoring the unit back to original condition. Sometimes tenants put in expensive equipments that becomes "attached" to the property, like a restaurant oven hood or walk-in cooler/freezer. In one instance, a restaurant tenant wanted to take their oven hood with them because it's an expensive piece of equipment that they could sell. The landlord however claimed it as attached to the property so has to remain with the property. The landlord later used this as an enticement to another restaurant tenant to move in.

In another case, a liquor store tenant moved out without taking down their walk-in cooler they had built. The landlord was on the fence about having it removed as it could add value to another liquor store tenant but there's no guarantee another liquor store would want the space. In the end, a different kind of tenant moved in and the landlord gave the tenant some concessions to make up for removing the walk-in cooler.

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Matt Morel

OP

Boise, ID · Member since 2012 · 3 posts · 0 votes

10y

Thanks for the responses and examples, guys!

I'm going to do some calling around to some local brokers and get a feel for what the majority of them are looking for and what their policies are in my area. Would they be able to tell me what the vacancy rate around here is?

I have a few more questions here:

- Do you guys have any suggestions on how we should go about negotiating?

- How long does it usually take, from start to move-in, to sign a commercial lease and get into that property? I realize that every situation will be different, I'm just looking for an estimated average timeline.

- Since our business won't have any financial history or track record, is our "personal guarantee" showing the landlord our personal finances - and showing them that they can pay the rent if the business is unable to?

-If we had a well drawn-up business plan, with conservative projections, and a few months worth of rent in a business bank account, would this be enough?

Sorry for all the rookie questions, we just want to go in prepared!

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Joel OwensBusiness Member

Moderator

Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes

10y

"give us plenty of time to be picky with the place we choose. Best case scenario, we find a nice place with a landlord who is extremely motivated to fill the space!"

These statements counteract each other. A highly desirable retail space will usually attract the national tenants and they will pay a premium per sq ft.

If I am landlord with a retail strip center and I have 90% occupancy I will be picky who fills the last spot.

Mom and pop tenants I generally look at liquidity and net worth. If you were weak on both fronts then I would try to get your parents or other family members with more assets to sign a personal guarantee in addition to yourself . I would also require monthly reporting of sales in the lease as well as yearly to assess how you are doing month to month with total sales versus your annual lease amount you pay. I like destination tenants ( barber shop, nail salon, restaurant, doctors office, environmentally green dry cleaners, gyms, karate schools, etc.) These are where customers have to go in the store and drop money. Your tenant then gets paid so they can give the landlord the rent each month.

90% of closures last year were clothing and furniture related in the retail space. I have no interest in those tenants as well as hobby stores,sports stores, etc. People can go in the store and test and touch the product then go online and buy it cheaper. Same with office supply stores.

If the building is really,really old and retail lease rates are say 10 a foot then a tenant doesn't have to generate much annual sales to make it work. If rents are higher for a desirable location then a struggling concept or mom and pop tenant will either shut down the location or try to renegotiate the lease rate.

As a mom and pop tenant I might give a few months free rent instead of any TI ( tenant improvements ) to the tenant. That way tenant spends the money and if they fail I am not out the physical money upfront. TI's for Starbucks of 40 a foot but they sign a 10 year lease with increases in rent guaranteed by the parent corp of 20,000 stores is strong. Even if that location loses money I get the full primary rent term and recover my TI I spent.

Additionally for mom and pop tenants I would not allow (blocked rent). This is where the rent goes up say 2% a year but it goes up 6% in year 3 or 10% in year 5 of the lease. With a national tenant you can pretty much depend on the rent increase happening. With a franchisee or a mom and pop concept they might only last 2 or 3 years into the full lease term so I want to get that 2% increase every year to keep up with inflation.

Mom and pop tenants try to get the world for lease terms but if the location is strong they have no leverage to negotiate. We had one mom and pop tenant in a center we were filling and they were weak as a tenant. So we put them in a new development spot that was weak where no national tenant would go in to fill space. If they make it great but if not it was dead space the majority of tenants didn't want to lease.

I wish you the best of success with your business just keeping it real from an retail center owners perspective.

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Questions About Renting My 1st Commercial Property

Questions About Renting My 1st Commercial Property

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