Whether this is your first commercial lease and your business’ first physical location or you’re renegotiating a previous lease, there are things you should know about how can you make the rent cost more favourable to you.
This article looks into the arrangement of rent in a commercial lease and how Common Area Maintenance fees can cost you extra. We also review tenant inducements – the instance where a landlord pays a tenant to rent their property.
Rent is (quite obviously) the biggest cost
Rent is usually charged as price per square foot. This price depends on the supply and demand for commercial properties in your area. Websites such as Kijiji or Spacelist have tons of commercial space listings. Looking through these listings in your desired area can provide an idea of how much a square footage should cost.
The cost of rent can also depend on your lease. If the landlord is responsible for any maintenance costs, then it’s not a surprise that your lease will cost more than if you had to pay those costs yourself.
There are generally three ways that rent is priced:
- Base plus a percentage of sales: this is common for shopping malls or retails spaces with multiple tenants. Shopping malls advertise themselves to draw people to the stores they house. By dipping into a percentage of their tenants’ sales, the mall is incentivized to better advertise themselves.
- Gross rent lease: Also known as a full-service lease, the landlord pays all or most of the expenses in this situation. This includes utilities, operational costs, taxes, and any other expense incurred with the general use of the property. It’s important to ask the landlord about amenities like janitorial services to really know what your rent is going towards.
- Net lease: The landlord charges a lower base rent compared to a Gross Rent Lease, but you have to pay a percentage of the expenses such as property tax or insurance. Net Leases are broken down into Single Net Lease, Double Net Lease, and Triple Net Lease. Each of these variations depends on what expenses you’re paying yourself.
The key to negotiating your rent cost is knowing what it includes. If you’re renting in a shopping mall, does the property manager commit to a certain level of advertising? Or in a Gross Rent Lease, exactly what does “maintenance cost” entail? Vague terms left in the contract could result in surprises you don’t want.
Don’t underestimate the Common Area Maintenance fees
Common Area Maintenance (CAM) is a cost commonly paid to the landlord in addition to rent. It covers needs like snow removal, grass cutting, or the maintenance of common hallways for all tenants on the property. CAM fees are allocated depending on a tenant’s square footage.
CAM fees can be fixed or variable. For a fixed CAM fee, there’s a simple flat fee that tenants pay on a regular basis. For a variable CAM fee, the fee can change depending on a variety of factors. This could include upcoming renovations or even weather—more snow means more snow removal.
When looking over your lease, make sure that you understand what the CAM fees include and that its definition is specific. Some landlords may use a broad CAM definition to add in indirect costs that don’t really benefit you or the other tenants.
Tenant inducements will help to save you money
Tenant inducements is a way to reduce your rent and/or reduce the overall cost of starting your business location. These inducements can come when a property has been vacant for a while and the landlord is desperate to take on a tenant. The landlord also provides a tenant inducement for renovating their property.
Tenant inducements are structured in a variety of ways. It can be a one-time cash payment, a rent holiday (such as the first three months rent-free), or a reoccurring allowance paid by the landlord to the tenant. Each method has its pros and cons and different tax implications. If you’re looking to negotiate for a better deal, asking for a tenant inducement may be the key.
While rent is the most important part of a commercial lease, don’t overlook CAM fees which can lead to unexcepted costs. Making sure you understand what’s included in any CAM fees and how it operates will prevent surprises. As well, when you get to the negotiation table, make sure to seek out tenant inducements which landlords may use to sweeten the deal.