You’ve got a great business idea. You’ve been searching for the right property for months, monitoring up-and-coming areas, and trawling the internet religiously. Then one day that space that’s perfect for selling your unique brand of widget has a ‘for lease’ sign in the window.
The agent gets you through for an inspection that day, and the property is better than you expected. You’re already imagining the fitout and the first customers through the door.
But one thing stands between you and your dream location – negotiating the lease terms.
For first-time commercial tenants, negotiating a commercial lease can seem daunting. If you’ve only ever leased residential properties in the past, you’ll find that commercial leasing has a few more variables to play with. The key to ensuring you get a good deal is striking a balance between these 5 core lease components:
It’s important to note that most owners won’t want to negotiate the ‘face rent’, primarily because property valuations are in part based on rental income, so reducing this can have negative consequences in terms of the lessor’s loan facility and possibly other tax implications. By keeping rent at the full rate, tenants are in a better position to negotiate harder on other lease conditions.
Lease Term and Option
The initial lease term is the duration that you will occupy the premises. Longer lease periods give landlords more security over their income and are therefore viewed more favourably. By considering longer lease terms, tenants are in a stronger position to request more incentives, or lower annual rent increases. An “Option Term” gives a tenant the right to lease the property for an additional term, without committing themselves until 3 to 6 months before the initial lease term expires.
Deposit and Bond
This component varies significantly from residential leases. Most landlords require that one month rent + GST is paid in advance, plus the equivalent of 3 months rent + GST be paid as a security bond. Even for a small shop with a monthly rent of $2,000 + GST per month, finding $8,800 upfront is an important consideration for budding business operators (and that’s before fitout costs). Remember that cash flow is king, and from a landlord’s perspective, a tenant that balks at a standard 3 month bond can be a red flag, so make sure your business is sufficiently funded before initiating lease talks.
Increases are usually a fixed rate per annum (2% – 5%) depending on the property location, exposure, foot traffic, etc. Alternatively, increases are calculated based on the current inflation rate or CPI. According to ABS Data, ‘Brisbane all groups CPI’ was relatively stable between 2014 and 2019, ranging between 1.4% and 1.9% p.a. COVID-19 has significantly impacted this range, with CPI swinging wildly from -1.0% in the June 2020 quarter, to +4.9% in the same quarter period a year later. CPI is a relative index, so until the world adjusts to a new ‘COVID normal’ and the economy steadies itself, tenants might consider a fixed rate instead, to better manage future cashflow and fixed expenses like rent.
Incentives come in many forms and can include rent-free periods, lessor works, cash or marketing contributions, and fitout assistance. The mechanics and benefits of an incentive are only limited by your imagination, and what a landlord will agree to. In Brisbane’s Bayside, a general guide to determine the value of incentives is 8.33% of the total lease value, or 1 month rent-free per year of lease term (eg: a 3 year lease = 3 months rent-free). This incentive could be further increased depending on the quality of the tenant, the length of the lease (5+ years), or how they add value to a property’s tenant mix.
Key to brokering a good lease for any commercial property, is finding a deal that works for both the landlord and the tenant, and that’s where a skilled commercial agent who negotiates deals every day is invaluable.
If you’d like to know more about commercial leasing or getting the best deal for your business or vacant premises, contact the award-winning team at Ray White Commerical Bayside today.