1. Negotiating a Commercial Lease
SCORE Chapter One – Washington DC Metro Area
washingtondc.score.org

2. Negotiating a Commercial Lease
SCORE Services
SCORE, a national, non-profit Association with over 10,000 volunteers in 364 chapters, is a resource partner of the US SBA. SCORE Chapter One has 50 Mentors, with diverse business and industry backgrounds, across the D.C. Area.
SCORE offers the following services:
Low-cost workshops - washingtondc.score.org
Individual free one-on-one counseling/mentoring
Online workshops, tools, and more at
SCORE teams provide counseling to assist you to:
Increase the value of your business
Identify and solve operating problems
Recognize and capitalize on new business opportunities
Develop business plans
Find sources and qualify for financing
Here are some of the ways that we at SCORE can help you start and grow your business.
All your interactions with SCORE are confidential

3. Disclaimer SCORE does not provide legal advice.
The information contained in this presentation is for general guidance on matters of interest only.
It is not a substitute for consultation with professional accounting, tax, legal or other competent advisors.
Before making any decision or taking any action you should consult a professional.

4. Richard Rose – SCORE Mentor
40+ Years in Retail Home Furnishings President & CEO - Town House Furniture 30+ Years as a Commercial Landlord B.S. University of Maryland SCORE Certified Mentor for 10 Years

5. Negotiating a Commercial Lease
Workshop Objectives
Develop an understanding of the important Terms & Issues in a commercial lease.
Develop an understanding of the Process used in negotiating a commercial lease.
Develop an understanding of strategies that can Mitigate Risk in a commercial lease.

6. What type of space are you looking for?
Retail
Office
Industrial
Warehouse

7. Understanding Commercial Rent

8. Calculating Rent
Rent is calculated per square foot - per year. Example: You’re quoted $50 per sq ft for 2,400 square feet = $50 X 2,400 Sq Ft = $120,000 per year or $10,000 per mo. Is this your Total Rent? Probably Not!

9. Understanding the Terms

10. Understanding the Terms
Result: Triple Net Rent is Base Rent Only!

11. Understanding the Terms
What happens in a Triple Net Lease?

12. An Example – Rachel’s Bakery
Rachel is planning to open a bakery.
She’s Looking at 1,200 sq ft in a 32,000 sq ft Center
She’s been quoted $40 per sq ft Triple Net – NNN
Real Estate Taxes are estimated at $4.00 per sq ft
CAM and Insurance are estimated at $7.50 per sq ft
What is Rachel’s Total Rent?

13. Doing the Numbers Triple Net Rent: Real Estate Taxes:
40 per square foot X 1,200 sq ft =
$48,000 per year or $4,000 per month
Real Estate Taxes:
$4.00 estimated per square foot X 1,200 sq ft =
$4,800 per year or $400 per month
Insurance and CAM Charges:
$7.50 estimated per square foot X 1,200 sq ft =
$9,000 per year or $750 per month
Total Rent = $61,800 per year or $5,150 per mo.
What is Rachel’s Potential Risk?

14. Rachel’s Potential Risk
Five (5) Year Lease - $309,000
Ten (10) Year Lease - $618,000
Startup Costs $238,598
Potential Risk years $547,598
10 years $856,598
The Take-a-Way!
Executing a Commercial Lease is a big deal.
There could be serious consequences if you fail.

15. Estimating Taxes, Insurance & CAM
Why are Taxes, Insurance and CAM Estimated?
Real Estate Taxes:
$4.00 estimated per square foot X 1,200 sq ft =
$4,800 per year or $400 per month
Insurance and CAM Charges:
$7.50 estimated per square foot X 1,200 sq ft =
$9,000 per year or $750 per month
How is the Exact Amount Calculated?

16. Pro-Rata Share
Tenants Pay Their Pro-Rata Share of Taxes, Insurance and CAM.
Calculating Pro-Rata Share -
Divide Tenant’s Premises in Square Feet by the Total Square Feet in the Building.

17. Rachel’s Pro-Rata Share
Rachel is looking at a 1,200 square foot space
in a 32,000 square foot shopping center.
1, ,
Rachel’s Pro-Rata Share = 3.75%

18. Negotiating a Commercial Lease
Understanding Taxes & CAM
Will the Tenant see the actual Real Estate Tax Bill? Will the Tenant be told what’s included in CAM? Will the Landlord be accountable? Will the Landlord Negotiate these charges?
PASS OUT REAL ESTATE TAX AND CAM SCHEDULES

19. Let’s Look at Rachel’s Taxes and CAM
* * * * * * * * * * * * * * *
Let’s Look at Rachel’s Taxes and CAM

20. Common Area Maintenance Summary
Clarendon Real Estate Investment Trust
Year: Tenant: Rachel’s Bakery
Common Area Maintenance Pro-Rata Share %
CAM Charges ,585.39
Administration Fees % 28,137.81
Total ,723.20
Pro-Rata Share-Rachel’s Bakery % 8, Amount Paid , Overpaid – Take Credit Next Month

21. Tax Summary Real Estate Taxes 142,000.00
Clarendon Real Estate Investment Trust
Year: Tenant: Rachel’s Bakery
Real Estate Tax Summary Pro-Rata Share %
Real Estate Taxes ,000.00
Legal Fees – Tax Appeals
Refunds: 2014 Tax Year
Total ,910.40
Pro-Rata Share-Rachel’s Bakery % 5, Amount Paid , Balance Due – Net

22. The Leasing Process

23. Step 1 - Prepare Yourself
Engage a SCORE Mentor or Advisor for Help
Prepare a Quality Business Plan.
Don’t be generic. Write the Business Plan yourself.
Identify your value proposition, differentiation, sales goals and projections.
Explain your assumptions and your marketing plans for success.
Include a detailed schedule of start-up costs.
Identify your Source of Funds.
Prepare a Personal Financial Statement

24. Step 2 – Retain a Leasing Agent
Your Leasing Agent will:
Review your Criteria.
Assist in finding a space.
Arrange for you to visit spaces.
Present your Offer.
Negotiate your deal. (The LOI)
Be paid by the Landlord.

25. Step 3 – Retain an Architect & General Contractor
Negotiating a Commercial Lease
Step 3 – Retain an Architect & General Contractor
Before or during the LOI process, you need to consult with an Architect and/or General Contractor.
Prepare a preliminary plan drawing.
Check out existing systems.
Your General Contractor should provide an estimate for build-out costs.
Be sure you understand the process and time line for obtaining Building Permits and the Occupancy Permit.
What is a reasonable Time Line?

26. Understanding the Time Line
Finding the Right Space Month
Obtaining Contractor’s Estimate Month
Negotiating the Deal – the LOI Months
Negotiating & Executing the Lease 1.0 Months
Pre-Lease Execution Months
Obtaining Architectural Plans Month
Obtaining Building Permits Months
Construction Time Months
Construction Time Line Months

27. Step 4 – Negotiate the Deal
Now that you understand the Issues, you’re ready to make an offer.
Offers are typically in the form of a non-binding Letter of Intent – LOI - prepared by your Leasing Agent.
The Landlord will ask for your Business Plan and Financials.
If interested, the Landlord will negotiate the terms of your offer.
Your Leasing Agent will negotiate on your behalf.

28. * * * * * * * * * * * * * *
Let’s Look at Rachel’s
Letter of Intent

29. Negotiating a Commercial Lease
Letter of Intent
1. The Tenant is a legal entity.
2. Location and size of premises.
3. Use of the Premises.
4. The Non-Compete Clause

30. Letter of Intent 5. The Lease Term – 3, 5 or 10 years? 6. Base Rent
7. Lease Commencement
8. Rent Commencement
Is there a Free Rent Period?

31. Letter of Intent 9. 3% Rent Increases – What’s the Impact?
Year Annual NNN Rent Monthly
, ,000
, ,120
, ,244
, ,371
, ,502
, ,637
, ,776
, ,919
, ,067
, ,219

32. Letter of Intent Percentage Rent 6% Applied to Sales above a
Normal Break Point.
Monthly Rent divided by 6% =
$4,000/.06 = $66,667 in Sales
Rachel pays 6% of sales
in excess of $66,667 monthly.

33. Rachel’s Monthly Percentage Rent
Rachel’s 2016 Total Sales 6% Rent Over $66,667 Break
January ,000
February ,000
March ,000
April ,000
May ,000
June , $6,000
July ,000
August ,000
September ,000
October ,000
November ,000
December , $6,000
Total Sales $583,334
6% Monthly Percentage Rent Total $12,000

34. Understanding Percentage Rent
What if we calculate the Normal Break Point Quarterly?
Quarterly Rent divided by 6% -
$12,000 / .06 = $200,000 in Sales – The Quarterly Break Point
Rachel pays 6% of sales in excess of $200,000 per quarter.

35. Rachel’s Quarterly Percentage Rent
Rachel’s 2016 Total Sales 6% Rent Over $200,000 Break
January ,000
February ,000
March ,000
April ,000
May ,000
June , $1, July ,000
August ,000
September ,000
October ,000
November ,000
December , $1,000
Total Sales $583,334
6% Quarterly Percentage Rent Total $2,000

36. Letter of Intent 11. Real Estate Taxes & CAM. 12. Option to Extend.
13. Utilities – separately metered.
14. The Condition of the Premises.
Tenant’s Work.
16. Tenant Improvement Allowance.
How is it paid?

37. Letter of Intent 17. Exterior Signage The Initial Deposit
19. The Security Deposit
20. The Personal Guaranty
21. Radius Restriction

38. Negotiating a Commercial Lease
Letter of Intent
Lease Preparation
Brokerage
LOI Disclaimer -
The LOI is a Non-Binding Agreement only when it includes a Disclaimer.
If the parties agree to the terms of the Letter of Intent, the Landlord will instruct his Attorney to prepare a Lease Agreement.

39. Step 5 – Lease Execution . . . Engage a Lawyer
The Lease Agreement is prepared by the Landlord’s attorney in favor of the Landlord.
The terms of the LOI will be incorporated into the Lease.
Your attorney will review the Lease.
Your responsibility is to read the Lease completely, understand it, and ask for changes in your favor.
Prepare for Success and Failure.

40. Additional Lease Issues The Assignment & Sub-Let Clause
The Transfer of an Interest in your business is an Assignment.
An Assignment or Sub-Let will almost always require Landlord’s Permission.
This clause is particularly important if you plan to bring others into your business.
The Assignment Clause is even more important if your business is in financial distress.

41. Additional Lease Issues

42. Questions?

43. Richard Rose, SCORE Mentor
Resource Listing
Richard Rose, SCORE Mentor
Score National:
Score Local:
SBA: