User Journey - Commercial Real Estate Lease Agreements
The process or user journey by which businesses enter commercial real estate lease agreements starts with the tenant's awareness of relevant commercial real estate parameters, followed by the evaluation process, negotiation and as last the set-up and access or finalizing of the commercial lease agreement. Below is an overview of the findings. Please note that no information was available for the specific tools used during the process.
USER JOURNEY TO LEASE COMMERCIAL REAL ESTATE
AWARENESS: Tenants set up commercial real estate parameters.
- EMPLOYEE POOL: Business owners who are looking for an office space tend to search for a commercial property that is convenient for their employees. Business retail owners or restaurants, however, tend to search for property in an area populated by people who like fast casual dining.
- COMMERCIAL PROPERTY ZONING: Commercial property placed in a zone for a specific use whether for leisure, retail, office or industrial.
- DESIRED SIZE: It is necessary to forecast the desired size of tenants workforce depending on the business.
- BUDGET: This is largely dependent on the business’s size and performance.
- ACCESSIBILITY: This parameter is dependent on the accessibility of the office space like parking lots.
EVALUATE: STEP after THE Tenant HAS found Commercial Real Estate to lease
THE TENANT FINDS A COMMERCIAL REAL ESTATE BROKER
- Next, the business should engage a tenant broker to help them find suitable locations to lease. A tenant broker knows the conditions of local markets, is able to negotiate, and can access financing options
- A tenant broker's fee is usually free to the tenant as the landlord normally covers this expense.
UNDERSTAND THE TYPE OF LEASES
- When the tenants obtain the lease terms in writing from the landlord or broker, they should understand the types of leases commonly used for commercial properties. The lease types include full-service leases, net leases, modified gross leases, and percentage leases.
- A full-service lease is most commonly when leasing office buildings. It normally includes all costs, including insurance, property tax, maintenance, repairs, cleaning and utilities.
- A net lease charges a rent that is lower than that of a full-service lease and the tenant will typically have to pay monthly expenses. There are three types of net leases:
- With a single net lease the tenant must pay for the real estate taxes separately but all other operating costs are paid for by the landlord.
- With a double net lease, the tenant must pay for the property insurance costs and the real estate taxes.
- With a triple net lease, the tenant must pay for the for taxes, insurance, and common area maintenance (CAM) costs, which include the cost for outbuildings and parking lots. Furthermore, the tenant must pay for their own utility bills.
- A modified gross lease requires the tenant to pay for taxes, insurance, and common area maintenance as a fixed lump-sum. The rent has no hidden costs and the landlord usually picks up the janitorial services and utilities.
- A percentage lease is commonly used by retail stores and requires the tenant to pay a base rent, which is due every month, plus a "percentage of gross sales above an agreed breakpoint."
NEGOTIATION: Tenants need to negotiate the terms and provisions
- The tenant needs to write a business letter of intent that states the intention to lease the space, provides a description of the business (which includes what the business sells, how the offerings are priced, how long they have been in business), and the terms proposed.
- Tenants need to understand important provisions in a commercial lease agreement that can help determine whether the lease is right for their business. Some of these provisions are:
- Permitted use — Commercial properties have a specific commercial purpose and it is stated in the agreement.
- Exclusive use — Guaranteed exclusive rights are of importance if the business is renting a space in a larger complex (like a shopping mall) and want "exclusive rights to a certain type of business. "
- Insurance responsibilities — It is important to decide if the landlord or the tenant or both are responsible for insurance. Important insurance types include casualty and liability coverage.
- Maintenance — The landlord is normally responsible for maintenance for commercial lease agreement.
- Payment and renewals — It is important to determine when rent is collected, how it is collected, what the grace period is, if the rent will automatically renew or if renegotiation is needed.
- Special provisions — The tenant needs to state if there any special provisions are needed for their specific lease. For example, is it okay to remodel the building, how will the dispute resolution process occur.
- Any commercial lease needs to have a number of critical terms and provisions included:
- Tenants need to be confident when confirming how long they want to lease a space, they need to know what costs factor into the lease (insurance, property tax, maintenance, etc) and the security deposit and the terms of its return s.
- Tenants also need to understand the difference between rentable square feet and usable square feet.
- Tenants need to understand who pays for and owns any modification made to the property.
- Other important things to know are the if sublease is allowed, what the renewal terms are, the termination clause, the Alternative Dispute Resolution (ADR), and sign specifications.
SET-UP AND ACCESS: FinISHING the process of negotiating THE commercial lease
- The client has an attorney that reviews the terms of their lease, explains specific terms that are not clear, and searches for issues that could form a problem or are not what they thought they had agreed to.
First, in order to answer the request, we searched for readily available information in survey or consumer reports, profile analysis detailing the user journey relating to commercial real estate lease agreements. Our primary focus was to find readily available information specifically methods and information, insights, and data surrounding the process of a businesses entering into a commercial real estate lease agreement. We did not find information on the user's journey specifically related to commercial real estate lease. Instead, we learned that most if not all the articles are guides on how to understand the process of commercial real estate lease agreements.
Next, we searched for data from government websites that compiled electronic copies of lease documents collected by the U.S. General Service Administration. We wanted to use this to find commercial real estate lease agreements and provide insights and data surrounding its process. However, most of the data found and was not relevant.
Last, we tried to look for information that could be used as a proxy data point by looking for the different users and tools used to secure commercial spaces and the process each type of company uses to enter commercial real estate lease agreements. The goal was to triangulate the required information through proxy or parallel data points. The data points included are the process of identifying, negotiating, and signing a commercial lease agreement and understanding the importance of the required steps in entering a commercial real estate lease agreement. We also tried to look for information for bigger business components, but this information was not available for larger businesses possibly because such data has not been made available to the public or no organization has not conducted research on this aspect.
We then changed gears and gathered all available information to provide helpful findings. After finding a list of articles and blogs with information on commercial real estate lease agreements we sorted out this information in terms of relevance and consistency. We then listed the process that is most common and effective for businesses entering into commercial real estate lease agreements. The goal was to provide the user's journey to commercial real estate lease agreements but upon checking, we noticed that all the articles regarded guides and considerations when entering into a commercial real estate lease agreement.
Based on the research and findings, we came to the conclusion that there are no specific tools used by different users that help when securing new commercial space. Also, the process identified was the same for all companies.