How To Negotiate A Commercial Lease
Your business is growing. That tentative, short-term lease you signed might have been ideal when you were trying to get your business off the ground, but now it’s time to look at a commercial property that further meets your needs as your business blooms.
Maybe you need a better location, nicer facility, or larger space. Regardless of your reasoning, signing a commercial lease is a big deal. But before you get to the signing part, commercial lease negotiation must take place to make sure you, the tenant, are getting a fair deal. After all, much of your business’ success and growth rate moving forward will depend on this pivotal decision.
Not knowing how to approach a commercial lease negotiation can leave a business with an agreement that bleeds the company dry of funds because of things like hidden fees or incurred expenses when the unexpected happens. Commercial leases are legal documents that should be examined closely and fully understood before signing.
As an industry leader in customer guidance, Kenwood is here to teach you the ins and outs of commercial lease negotiation.
Know Your Loan Options
According to Fundera, the top five types of commercial real estate loans are:
- Traditional commercial real estate loans from banks
- SBA commercial real estate loans
- Commercial bridge loans
- Hard money loans
- Commercial real estate crowdfunding
These are just some of the many commercial real estate loan options, and finding the right one ahead of a commercial lease negotiation could go a long way in helping you get the best agreement. Knowing how you plan to fund your commercial lease obligations ahead of signing your lease can also save time on paperwork and during the application process.
A traditional commercial real estate loan is one that comes from a bank. This is a popular option because banks tend to lend the most amount of money at the lowest cost. But these types of loans can also be hard to get. They require high credit scores from the borrower and proof that the business is generating a profit.
There are two types of SBA commercial real estate loans: the 7(a) program and a 504 loan. The 7(a) program allows for the SBA loan to be used for many different business purposes and has a term of 25 years at rates that range from 7 to 9.5 percent. SBA 504 loans are intended to help small businesses that need to purchase or upgrade commercial property or equipment. These loans have a term of either 20 or 25 years and fixed rates at around 5 percent.
Banks or other capital lenders can provide commercial bridge loans, which are aptly named because they are short-term loans that help commercial lessors bridge the gap between finding the right commercial property and securing long-term financing. When these loans mature, they must either be paid in full or more commonly, refinanced into a longer-term loan.
Hard money commercial real estate loans come from private lenders and investors and are typically short-term loans. These also tend to be for smaller loan amounts than a bank would normally lend and come at higher interest rates. What makes these loans attractive is that they can be much easier to get approved for than bank loans.
The newest form of commercial real estate loans is crowdfunding. This is where many people lend small amounts of money to your particular project. All these little donations/investments equate to one big commercial real estate loan.
Ideal Interest Rates
Fundera’s research also shows that current commercial real estate rates range from between 5 to 30 percent. On average, a borrower pays an interest rate of about 10 to 20 percent. The interest rate you qualify for depends on a variety of factors, starting with the type of loan you choose. Knowing the type of interest rate you’re eligible for will greatly help you during your commercial lease negotiation.
As stated above, SBA loans can range from 7.75 to 10.25 percent. Traditional bank loans will typically range from 5 to 7 percent. The cost of commercial real estate has been steadily increasing in recent years and now sits at nearly 30 percent higher than its peak before the 2008 recession. Because of this increased cost, finding an interest rate that you can afford has become as important as ever.
The interest rate a borrower receives depends heavily on their credit score. Those with high levels of credit can usually qualify for bank or SBA loans. Those less creditworthy borrowers might have to opt for other avenues such as a hard money loan or crowdfunding.
Building Value Analysis
Besides knowing the type of loan you’ll be using to fund your commercial real estate lease and the interest rate you qualify for, knowing how to analyze the value of a commercial building is also helpful when partaking in commercial lease negotiation.
Placing a value on a commercial property can be quite complicated but there are a number of approaches that can be taken to get there. Some of the most widely used approaches include the cost approach, sales comparison approach, income capitalization approach, value per gross rent multiplier, and value per door.
The cost approach is a valuation method that considers what it will cost to rebuild the structure from scratch. The sales comparison approach (or the market approach) looks at recent sales data for comparable properties. Income capitalization approach is based on the amount of income an investor expects to derive from a particular commercial property. The value per gross rent multiplier is an equation that some use to place a valuation on commercial real estate. This equation takes the price of the property and divides it by its gross income. Apartment buildings tend to use a value per door approach, which determines a property’s value based on the number of units in the building.
Other Commercial Lease Negotiation Tips
- Evaluate the length of the lease
- Research comparable rents
- Look for hidden costs/fees
- Read the termination clause closely
- Make sure any other essential clauses are added
At Kenwood, we are always happy to discuss commercial lease negotiation with our prospective tenants. For more information, contact us here: