Understanding the Financial Terms in a Commercial Lease

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It often comes as a shock to first-time tenants that the financial responsibilities in a commercial lease go far beyond the monthly rent and security deposit. Some say being a commercial tenant is much more like home ownership than renting an apartment because the responsibilities of a commercial tenant are extensive and on-going. The commercial tenant also likely shares a portion of costs for common areas such as hallways, elevators, parking lots, lobbies, public bathrooms, and building security.  

We recommend spreadsheeting and negotiating the financial terms at the Letter of Intent stage, if possible, because before signing the LOI is when a commercial tenant has the most leverage. The following lists include some common items to look for, understand, and possibly negotiate.  

Items which add cost: 

  • Square Footage. Look for the terms usable, rentable, or gross to understand what space is being paid for. Does it match with what you need, want and can use?
  • Permit and Zoning. Is the space permitted and zoned properly for your use? If no, what is the process and cost to get that done?
  • Common Area Expenses. Are you responsible for a pro rata share of common areas and facilities maintenance? How is the pro rata share determined? What charges will you pay for? How are they calculated? Ask for the last couple years charges so you know what to expect.  
  • Utilities. Are some or all of the utilities included in the rent? Is there a charge for heat and air conditioning outside of normal business hours? 
  • Maintenance. Is a cleaning service included? Are there other costs to be proportionately shared such as snow removal? How much could these unpredictable costs vary from year to year? 
  • Property Taxes. How much of the landlord’s tax burden will be passed through to the tenant?  
  • Insurance. Are there minimum types amounts of coverage the landlord will require the tenant to carry? Is the tenant responsible for any share of the landlord’s insurance? 
  • Personal Guaranty. Do the individual owners of the company have to agree to be responsible for the tenant company’s obligations? If so, what financial disclosures does the owner have to show to the landlord? If rent isn’t paid, can landlord enter a judgment against the owner without filing a complaint and move directly to collections from the owner’s bank account, wages or assets? 

Items which potentially reduce cost: 

  • Tenant’s improvement allowance. Will the landlord pay for construction or renovations to get the space ready for the tenant to move in? Who decides what work will be done?
  • Rent abatement. Is there any free rent? When do free months occur? Do the free months extend the term of the lease? Does the tenant still pay other expenses during the free months? 

These lists (while not exhaustive of the issues) should get you thinking about what the true financial obligations of the lease are going to be and about what leasing expenses your cash flow will need to support.

We’re here to help you navigate this process so you are prepared and ready to go when handed the keys.

Natasha M. Nazareth, Esq.
Ginny Cascio Bonifacino, Esq.