Commercial Entrepreneur’s Guide 

 

STANDARD REQUIREMENTS

 

Commercial real estate 

 

Office - is of a temporary nature and is not to be used as a dwelling unit or living quarters during the time it is used as an office, and further, if it is limited to a period of one year unless the time is extended by the City Commission.

 

Coworking - is an environment that's designed to accommodate people from different companies who come to do work. Coworking space is characterized by shared facilities, services, and tools

 

Industrial space refers to accommodation for manufacturing, storage, distribution, and warehousing purposes, together with smaller workshop premises.

 

Retail space - means a Leased Space used by Tenant for the sale at retail of Merchandise, including any Additional Space or Relocation Space used for that purpose

 

A restaurant means space in a building maintained, advertised, and held out to the public as a place where individually priced meals are prepared and served primarily for on-premises consumption and where the primary source of revenue from the operation is the sale of food and not from the sale of alcoholic or malt beverages

 

Flex space is short for the flexible property. For anyone interested in commercial real estate investing, this is an important term to know. These buildings can stand alone or be in dense, single-story industrial parks.

 

A medical office means a building intended for use in the provision of medical services, without facilities for accommodating patients overnight. This shall include medical, dental, chiropractic, and veterinary offices and clinics.

 

Land refers to the earth's surface down to the center of the earth and upward to the airspace above, including the trees, minerals, and water. Real estate is the land, plus any permanent man-made additions, such as houses and other buildings.

 

The warehouse is a building for storing goods. Warehouses are used by manufacturers, importers, exporters, wholesalers, transport businesses, and customs. 

 

At InRealEstate, we pride ourselves on our ability to offer tailored guidance, support, and strategy based on the unique needs of each commercial client we work with.

 

Signing a commercial lease can be one of the most significant and expensive choices that you can make as a business owner. Investing the time to create a plan will give your business an advantage. This section presents some important considerations when developing your plan.

 

A lease is an agreement between a landlord and a tenant that allows a tenant to occupy a space for a certain amount of time. Commercial leases and residential leases have important differences.

 

Lease Process

This section gives an overview of each step toward signing a commercial lease. Depending on the size of the space, the length of the lease, and how the landlord usually handles leases, you may not follow each of these steps. 

Request for proposals

Your broker or tenant representative will help you identify the desired location and the type of space you need. The broker will then gather information or proposals from multiple landlords for you to compare. Proposals usually include basic terms, including length of the lease, base rent, any additional rent, utilities, security deposit, and possibly other items discussed in detail below. 

Letter of intent or term 

After gathering proposals, consulting with professionals, and discussions with landlords, decide which space you want. The next step is often to prepare a letter of intent, also called a term sheet, with the landlord. The letter of intent contains basic terms of the lease, such as rent amount, length of the lease, and security deposit that you and the landlord agreed to. The letter of intent is generally not a contract. Do not make payments to the landlord or start alterations before the lease is signed. Many important terms are on the lease itself. Once the term sheet is agreed upon, the landlord will usually have its lawyer prepare the lease. 

Consult with your broker and lawyer before signing a letter of intent. It is important to include terms that are important to you because the landlord may not renegotiate those terms during lease negotiations. If the landlord will not agree to the terms you need to operate your business, the space may not be a good fit for your business. Knowing this will save time and money negotiating a lease you won’t sign. 

For small spaces or short-term leases, the landlord may choose to skip a letter of intent and move right to the lease negotiation. 

The lease

The landlord will usually propose the first version or draft of the lease. Many commercial landlords use a template or form lease. The lease can be difficult to understand because of the way it is written, the length, and the small print. This version will usually heavily favor the landlord. The lease should include the terms included in the term sheet but will contain many other important provisions. Carefully review the lease with a lawyer so they can explain your rights and obligations and help negotiate favorable terms for you. You can negotiate changes to the landlord’s offered lease terms. Write changes on the lease or add them in a separate document, called a “rider.” The rider is attached to the lease and contains terms that add, clarify, or replace terms in the form of a lease.

You may only be able to negotiate a few changes to the landlord’s offered terms. If your lease is for a small space, the landlord may be reluctant to make any changes to its lease. It is critical that professionals explain what these terms mean for your business. The written lease will govern your relationship with the landlord. Do not depend on oral statements from the landlord. Everything you agree to with the landlord should be written in the lease. If a term is not included in the lease, it has no effect.

 

Assignment & Subleasing 

Even with careful planning, you may decide it is best for your business to move to a different space, maybe larger or smaller, or in another location, before the lease ends. Or you may decide you need to share the space with another tenant to help you pay the rent. You may also choose to close your business during the lease term.

To reduce personal and business liability, you may want another business to take over your lease by assigning or subleasing the space to them. You can negotiate and include in the lease to have the right to assign the lease or sublet the space. Most landlords will only permit an assignment or sublet with its prior written consent. You can, however, negotiate a provision in the lease that requires the landlord to be reasonable in giving its consent.

Whether you assign the lease or sublet the space, you still have obligations and liabilities under the lease. If the new tenant fails to pay rent, you, the original tenant, will be responsible for the unpaid rent. The same is true if a subtenant does not pay rent. Landlords will sometimes allow assignments or subleases to companies that are affiliated with the original tenant. For example, if you sell your business to a new owner who continues to operate the business with no substantial changes.

 

Assignment of a Lease: An arrangement in which the rights and obligations of the original tenant are transferred to the new tenant. The new tenant pays rent to the landlord.

 

Sublease: An arrangement in which the tenant rents its space to a subtenant. The subtenant pays rent to the tenant. The original tenant remains the tenant under the lease and pays rent to the landlord.

 

The basic financial terms of the lease may have a significant effect on your business’s success. These terms include the base rent, additional rent, length of the lease, permitted uses, and utilities.

 

Base Rent

Rent is often divided into separate categories. Base rent is the minimum rent that the tenant owes the landlord each month for occupying the space.

Base rent is usually calculated as an annual amount. The amount is determined by multiplying the size of the space by a dollar amount. This is what “rent per square foot” means. The rent per square foot is generally determined by the market. The landlord will charge what other landlords are charging for similar spaces in similar areas. The size of the space is usually the square footage of the space plus a portion of common areas, such as common hallways or bathrooms. The addition of this common space turns the “usable” area of the space into the “rentable” area. The rentable area is then multiplied by the dollar amount per square foot to determine the base rent.

 

Usable vs. Rentable Area: The usable area is the space that you control. The rentable area includes the usable area plus a portion of the common areas.

Additional rent 

The landlord will likely require you to pay costs in addition to the base rent. This is because the landlord’s own expenses, such as the property’s operating expenses and real estate taxes, will likely increase over time, and landlords generally prefer for tenants to cover a part of these expenses. 

 

The additional rent takes various forms. Your lease may make you responsible for paying one or a combination of the following: 

A share of the increase in operating expenses. 

A share of the increase in real estate taxes. 

A fixed annual percentage increase of the base rent (e.g., 3% each year); or 

An additional rent increase based on some other measure (e.g., increased wages for building staff). 

To plan for these expenses, ask the landlord or broker for an estimate of additional costs. 

 

Renewal Options

There is no requirement for business owners to renew their lease. Once your lease expires, the owner is also allowed to claim any amount of rent. Protect yourself against a high increase by negotiating a renewal option within your lease. Options for determining the rent increase include a fixed rent increase or a "market" base rent, also referred to as fair market rent. The fixed rent is a fixed amount that your rent will go up every year. In general, the increase is between two and three percent each year. The fair market value of rents is determined by examining rent-like prices in the same region. Consider having the owner set a cap on the increase. The limit could be a fixed amount or a percentage of fair market rent (for example, 90% or 95%). If you and the landlord cannot agree on market rent, it is common practice to appoint a neutral broker or appraiser to determine the market rate.

If your lease is non-renewable and you wish to remain within your space, contact your landlord well before the end of your tenure to apply for a lease renewal. If you are a good tenant, the owner can be motivated to extend the duration to a reasonable rent. 

 

Option for renewal: The lessee has the option of renewing at the end of the lease. The most common business lease term is 10 years with a 5-year renewal option.

Utility Charges & Services 

When comparing and deciding across spaces, the utility payment method is a significant cost factor.

Electricity: The largest expenditure on utilities is electricity. You will generally pay the electric charge in addition to the rent. There are two types of electricity payment: 

Direct Meter – Power is obtained directly from the utility. This is generally the most inexpensive option and is called a "direct meter." 

Submeter – The owner charges you according to your real use, measured by a submeter. 

Other utilities: Water, wastewater, heat, and gas are less expensive and are generally charged by a fixed quantity or per meter. If the use is small, such as the normal use of the bathroom, the owner can cover this cost in the base rent or will determine a fixed cost. 

If the user is high, the lessor may not want to take the risk of a fixed charge, so he will measure and bill you for the actual use. An owner is only responsible for providing the public services and services agreed upon in the lease. Your lease should provide power, water, heating, air conditioning, passenger elevator and freight service (except if you are on the ground floor), and potentially gas, cleaning, and directory lists. 

 

Security Deposit 

The landlord will usually ask you to put up a deposit when you sign the lease.

Discuss the security deposit is available at the Terms and Conditions stage. The security deposit protects the landlord if you don't pay the rent or if you don't live up to the lease. The deposit is reimbursable, but the owner will hold the deposit on your behalf for the duration of the lease. The owner can deposit the money in an interest-bearing bank account. In this case, you can receive the interest when the owner provides you with the security deposit. 

 

The amount of the security deposit depends on a few things: 

Amount of the base rent 

Your business’s financial condition. If your business has little or no financial history or has limited access to cash or credit, the security deposit may be quite large. In this case, the owner may be willing to negotiate a refund of a portion of the security deposit after a few years if your company succeeds.

If you have provided a guarantee (refer to the next page). 

The security deposit is generally equal to a certain number of months of rent. The number of months is usually two, but it depends on the aforementioned factors. The owner can also demand a letter of credit from an acceptable bank as a security deposit in place of or in addition to cash. 

At the end of the lease, the landlord would be required to pay back the security deposit. 

If you leave the space in the condition required by the lease and you are not liable to the landlord under the lease. The landlord will generally refund the security deposit between 30 and 45 days after you leave the space. 

 

Letter of Credit: A document by which the bank warrants that it will pay the security deposit if the lessee is unable to do so. The bank charges a fee and may require collateral, such as a mortgage on your home.

 

Guaranty 

Even if the business entity is the tenant under the lease, the business owner may request that you provide personal security. This means that you take personal responsibility for the obligations set out in the lease. A guaranty of all the obligations of the tenant is considered a “full guaranty.” A “good guy guaranty” is a “partial guaranty.”  

 

Whether the owner will need security depends on the following factors: 

The financial situation of the leasing entity. If the business is new and does not have any history or financial value, the landlord is likely to need security. If the business has a high dollar value, the lessor may not require security. 

The amount of the security deposit. If you can provide an important security deposit, the owner may not need a security deposit. 

If a full guaranty is not required, the landlord may still require a “good guy guaranty.” 

If the lessee entity (e.g., the business) does not respect the lease and leaves the space, 

the guarantor (i.e., business owner) is not personally responsible for the rent for the period following your departure. However, the lessee that has signed the lease may still be liable for the remaining rent. 

 

Insurance 

Insurance reduces your risk by protecting your business from claims for personal harm or loss of property. Your landlord will probably demand that you keep the insurance. At the very least, you will typically require commercial general liability insurance and personal property insurance. If your business is in a flood-prone area, you may also have to obtain flood insurance. Contact an authorized insurance broker for information on the types of insurance that will help you better protect your business. In addition, get business interruption insurance to cover loss of income if your business is temporarily closed because of damage to your space. This insurance can only cover damage caused by certain accidents and not others. Consider the arrangements before deciding.

 

Permits & Licenses

Before beginning significant alterations, you may need to obtain permits and approvals from governmental agencies. Your licensed professionals will determine which permits are necessary for the work and will prepare and submit the applications for permits and approvals on your behalf. 

Alterations during the term 

Most landlords will allow you to make cosmetic or decorative alterations to the space without its approval. There will often be a limit to the cost and type of alterations you can make. While painting and installing wall or floor coverings are unlikely to require the landlord’s approval, most others will. This should be written in the lease. The landlord will always require review and approval of alterations that require a permit or affect any building systems. 

 

Americans with Disabilities Act (ADA): The ADA is a law that prohibits discrimination against people with disabilities, making sure spaces open to the public are accessible to the disabled.

 

General Closing Procedures

The applicant and guarantor will need to provide the following supporting documents.

 

Supporting Documents:

This is the package of documents that will be required for the building to rent commercial space under a personal name

A government-issued photo ID (driver’s license, identity card, passport, etc.)

The first two pages of the last two years’ tax returns

Three most recent complete bank statements

 A landlord asks for the first month's rent and a 3-month security deposit equal to one month of rent

 

This is the package of documents that will be required for the building to rent commercial space under the company name:

A government-issued photo ID (driver’s license, identity card, passport, etc.)

The first two pages of the last two years’ tax returns

Three most recent complete bank statements

Copy of Filling Receipt 

Copy of EIN Tax paper (Employer Identification Number)

A landlord asks for the first month's rent and a 3-month security deposit equal to one month's rent. 

 

This is the package of documents that will be required for the building to rent commercial space under the “good guy guarantor”:

A government-issued photo ID (driver’s license, identity card, passport, etc.)

The first two pages of the last two years’ tax returns

Three most recent complete bank statements

3 months Security Deposit and First-month rent

Copy of Filling Receipt if the “good guy guarantor” has a company.

Copy of EIN Tax paper (Employer Identification Number), if the “good guy guarantor” has a company.

A landlord asks for the first month's rent and a 3-month security deposit equal to one month of rent

 

If your documents will be not qualified, the landlords can ask for the first month's rent, last month’s rent, and from 3–6-month security deposit equal to one month’s rent.

What documents are required to rent commercial space?

 

The term Commercial Lease Agreement refers to a contract that governs the renting of commercial property to or from an individual or company. The contractual agreement gives the lessor (e.g., the renter) the right to use the property for business purposes from the start of the lease to the conclusion of it. Typically, the term of a commercial lease includes information about the landlord and tenant, such as the tenant's guarantor, the rent, and the duration of the lease.

This is the package of documents that will be required for the lease to rent commercial space: 

A government-issued photo ID (driver`s license, identity card, passport, etc.)

The last two pages of the last two year`s tax return 

The last two recent complete bank statements  

Frequently asked Questions

What are the lease terms?

 

A leasing term is a period that should be occupied by the tenant in a rental commercial space for as long as the lease is valid. It can be renewed after the full term has ended; however, a termination fee might apply.

 

How to handle subletting and assigning?

 

A lease assignment is an arrangement that transfers rights and obligations from an original tenant to a new tenant, who then pays the landlord rent. A sublease is an agreement under which a tenant sublets space to another tenant. The subtenant pays rent to the original tenant, who continues to pay rent to the landlord. A landlord may permit subleasing or assignments to companies affiliated with the original tenant. For example, if a new owner purchases your business, but continues to operate it with no substantial changes.

 

What is the penalty for breaking the lease?

 

The process of breaking a commercial lease is not simple, but paradoxically, it might not be as complicated as it sounds. Therefore, it depends on the particulars of the situation; certain circumstances make terminating the lease easier. Commercial leases typically impose a late payment penalty of five to ten percent of the rental amount. In many cases, a late fee must be charged because the renter failed to make payments on time. In the absence of a clause that stipulates a late fee, you cannot demand that your tenant pay it the next time he or she is late in paying rent.

 

What is the requirement square feet for commercial space in NY?

 

Commercial square footage for a rectangular space is calculated by multiplying the width by the length. As an example, a space 12 feet long by 12 feet wide is 144 square feet.

 

What amenities are included in the building? 

 

Immovable property used for industrial purposes is known as commercial property. The term commercial property usually refers to properties that have businesses or land that is intended to make a profit, as well as larger residential properties for rent.

 

What is a floor plan and what information does it provide? 

 

A floor plan is a drawing of the physical layout of a building, which shows the relationship between rooms, spaces, furniture, and other features from an aerial view. Clients can use it to gain a better understanding of how specific details can be arranged to promote the best operations.

 

How to find a commercial space with a good location? 

 

Strategic decisions must be made when it comes to commercial space. Location strategies can mitigate the financial performance impacts of expansion and consolidation. It is of significant strategic importance for organizations to choose where to locate, as decisions about new locations, expansions, and consolidations can significantly impact their operating results. The importance of leveraging a well-developed location strategy is being recognized more and more often by organizations.

 

How much is the rent?

 

It is common to categorize rentals into different types. Rental agreements specify the minimum rent that must be paid to the landlord each month. According to most rental agreements, the amount of base rent is calculated annually. In essence, square footage is multiplied by a dollar amount. In other words, "rent per square foot" is how much you pay for rent per square foot. Rental rates are generally determined by the market. Rent will be calculated by comparing what other landlords in the area charge for similar spaces. It is usually measured by including all the square footage of the space plus a portion of common areas, such as common hallways and bathrooms. The common space transforms the "usable" area of the space into the "profitable" area. In order, to determine the base rent, the profitable area is multiplied by the dollar amount per square foot.

 

What’s included in the deposit?

 

Security deposits are generally required when signing a lease by landlords. The security deposit can be discussed during the term sheet. Rent is protected by the security deposit if you don't pay rent or violate the lease. During the term of the lease, the landlord will hold the security deposit on your behalf. It is possible for the landlord to deposit the money in a bank account that earns interest. As a result, the landlord may return the security deposit with interest.

There are several factors that affect the security deposit amount:

The amount of the base rent

Financial information about your business.

A guarantee 

Letter of credit.

 

How to pay rent?

 

This is what property owners and landlords should be aware of when it comes to traditional rent payment methods: 

Checks

Cash

Money Order

ACH Electronic Transfer

 

What`s utilities are included in the cost?

A landlord usually provides heating and air conditioning via a building system or a unit specific to tenant accommodation. Throughout the lease agreement, the landlord must only operate the building's heating and air conditioning systems during those hours. It is your responsibility to inform landlords if tenants need the systems to operate after those hours, who will usually charge tenants an overtime fee. Nevertheless, you will likely need to repair, maintain, and replace the unit. As part of the lease, the landlord is responsible for providing utilities and services. Electricity, water, heating, air conditioning, passenger, and freight elevators (unless you're on the bottom floor), and possibly gas, cleaning, and directory listings should be included in your lease. An important cost consideration when choosing between spaces is how the utilities are to be paid. In terms of utility expenses, electricity is the biggest expense. 

 

What is renter insurance?

Insurance: Protects your business from lawsuits for physical injuries.

Property insurance: Covers damage to personal property and the space when caused by fire, theft, vandalism, or some natural weather events.

A business insurance policy protects it against lawsuits for physical injuries.

In general, property insurance covers damage to personal property and the space, such as damage caused by fire, theft, vandalism, or natural disasters.

An indemnification contract obligates a person or company to compensate losses or damages.

Business insurance limits tenant exposure to risk by protecting tenants against claims of property loss or personal injury. Most landlords require tenants to maintain insurance. It is usually a good idea to have commercial general liability and personal property insurance. It may also be a good idea to purchase flood insurance if your business is in a flood zone. 

 

What is a guarantor for a commercial lease?

 

Generally, the guarantor (usually the business owner) agrees to be personally liable for lease payment obligations owed by the business under the terms of a commercial lease if the business fails to pay rent or fails to pay rent if it vacates the leased space before the lease term is over.

 

What is commercial tenant improvement?

 

As a tenant improvement, TIs (tenant improvements) are the customized alterations that are made by a building owner to rental space as part of a lease. These modifications are made to enable the tenant to customize the space to suit their needs.

 

Tenant improvements consist of any modifications made to the rental property to meet the needs of a particular tenant. A few examples of these changes and alterations are painting, installing partitions, replacing floors, or installing customized lighting fixtures.