Leasing terminology and concepts

So you've decided to take a chance and finally go for that dream of opening your own business. You have this great idea, business loans ready and all that is standing between you and guaranteed success is finding the right retail space to lease. Well not so fast. Finding the right retail space to lease, negotiating a fair price and making sure you get the space you deserve can be a harrowing experience with many twists and pitfalls along the way.

This first post will try to familiarise you with some terminology and concepts that you will come across when searching for a new retail space location.


Leasing terminology and concepts

When dealing with a commercial lease there are certain terms and definitions you will need to understand as they are critical in assessing weather you are getting a good deal or not.

• CAM - Stands for Common Area Maintenance fees. This most closely resembles Condo fees in the residential housing. CAM fees are your proportionate share for the upkeep of areas at a commercial property that serve all tenants (ex: Parking lot, shared electrical room, lawn) This will include exterior lighting, parking lot repairs, snow removal, landscaping, garbage removal and anything else for common use. CAM fees are quoted on a $ per ft² per year basis.

• NET LEASE - Net lease is a type of commercial lease that generally stipulates that the Tenant (meaning you) is responsible for all repairs, upkeep and replacement of everything inside your space as well as any equipment servicing your space exclusively (ex: electrical entrance, HVAC unit). Net leases are generally the standard for retail spaces in strip malls or mixed use commercial properties. What you must realise is with this kind of lease you will be on the hook for everything that is not part of the building structure, which is almost everything except the roof and load bearing walls.

• GROSS LEASE - A gross lease is a type of lease that generally stipulates that the Landlord is responsible for all major repairs and maintenance of the leased space. This type of lease is more commonly seen in office buildings and unless you're leasing office space you will be hard pressed to get a Landlord to offer you this kind of lease.
  

• TI - Stands for Tenant Improvements and this is an industry term for an amount a Landlord is willing to offer you as part of the lease deal to do improvements on your new space. This is usually offered on larger deals or longer term leases as an incentive.

• RENEWAL OPTIONS - This concept describes the practice of including in the lease an option to renew the space at the end of your lease term. The reason this is important is having an Option in your lease insures that you will be able to hang on to your retail space when your initial lease expires. Without this the Landlord is not obligated to renew you at the end of your lease. Having renewal options also has an added benefit of improving your chances of selling your business should you decide to do so down the line.

• Capital Expenditure - This is a term that deals with large improvements to the whole retail center you occupy. Roof replacement, facade upgrades, large parking lot repaving projects can all fall into this category. It is important to understand that CAPEX are usually very big amounts and sometimes the Landlord will try to offload all or part of this cost onto its Tenants.
  

• CPI - Consumer Price Index. This is often included in the lease to adjust your future rent to compensate for inflation.

• SECURITY DEPOSIT - Landlords will almost always ask for a deposit from a Tenant that does not have previous proven retail businesses or history. The less solid your company or personal finances are the more will be asked of you as a way to guarantee against their losses in case something should go wrong. Do expect to get asked for one if it's your first business. The amount asked usually equates to several months rent and can range from 1 month rent to 6 month or more depending on the deal. This money is returned to you at the end of your lease when you move out and fulfill your all your obligations stipulated in the lease.

• OFFER TO LEASE - It is important to understand the difference between an Offer to Lease and an actual Lease. You will receive an offer to lease during your negotiations process and will end up signing it should you decide to proceed with leasing a space but this is just an offer. You will still have to sign a final lease which will dictate your relationship with the Landlord for the duration of your stay. Do not mistake the two, as your final lease may sometimes vary from the offer you sign.

This concludes the sections on terms and concepts. There will of course be many of these that you will come across that are not mentioned here but this will give you a good head start.

In my future posts I will do a step by step walk through of the processes of renting a retail space from searching for a location to building it out and taking possession.