Check Your Understanding: Financial Factors to Consider When Entering into a Commercial Lease

Upfront costs to a landlord incurred on a typical office lease transaction may include, free rent concessions, a tenant improvement allowance and brokerage commissions.

The following are among the primary factors that determine how much free rent a landlord may give to a tenant: (a) current market conditions; (b) whether the lease is for office, retail or industrial space; and/or (c) the length of the lease term.

An important carve-out for a tenant is to include capital expenditures in the operating expense definition.

Examples of cost reimbursement and protective language for landlords to include in its good guy guaranty may include: (a) guaranteeing that all work started by a tenant will be completed and paid for lien free (in short, the equivalent of a construction completion guaranty); (b) the tenant being required to give landlord between sixty and one hundred eighty days written notice prior to its space being surrendered; and (c) requiring tenant’s owner to reimburse landlord for those costs initially incurred by landlord relating to its lease of the space if surrendered within the first three to five years of the lease term.

Tenants should negotiate into its lease that its security deposit will be reduced in one or two month increments after a period of two to four years from the lease or rent commencement date (provided it is not then in default of its lease beyond the expiration of any applicable notice and cure period).