The Art of Commercial Lease Negotiation
Commercial leases in New Jersey and New York involve significantly more complexity than residential agreements. Terms are highly negotiable, and the decisions made during lease negotiations will impact your returns for years, sometimes decades. Understanding the key leverage points and potential pitfalls is essential for any commercial property owner.
Lease Structure: Choosing the Right Type
Triple Net (NNN) Leases
In a NNN lease, tenants pay base rent plus their proportionate share of:
- Property taxes
- Insurance
- Common area maintenance (CAM)
Best for: Single-tenant buildings, credit tenants, landlords who want predictable income
Modified Gross Leases
The landlord pays some operating expenses, typically with a "base year" stop, tenant pays increases above the base year.
Best for: Multi-tenant office buildings, competitive markets
Full Scope/Gross Leases
All operating expenses included in rent. Simpler for tenants but requires accurate expense forecasting.
Best for: Class A office space, markets where tenants expect all-inclusive pricing
Critical Lease Terms to Negotiate
Rent Escalations
Fixed annual increases (2-3%) provide predictable growth. CPI-based escalations can vary unpredictably. Consider a hybrid approach with a floor and ceiling.
Tenant Improvement Allowances
TI dollars attract quality tenants but impact your returns. Structure TIs carefully:
- Amortize TI costs into rent over the lease term
- Require buildout plans before funding
- Retain ownership of improvements at lease end
Renewal Options
Renewal options benefit tenants more than landlords. If you include them:
- Set rent at fair market value or a formula
- Require advance notice (12-18 months)
- Make options personal to the original tenant
Assignment and Subletting
Control who occupies your space:
- Require landlord consent (not to be unreasonably withheld)
- Include recapture rights
- Share in any sublease profits
Protective Clauses
Personal Guarantees
For smaller tenants, require principals to personally guarantee lease obligations, especially important for new businesses.
Use Restrictions
Define permitted uses specifically. Protect against incompatible uses that could affect other tenants or the building.
Default and Remedies
Specify cure periods, late fees, and your remedies upon default. New York has specific requirements for commercial eviction notices, ensure compliance.
Expert Commercial Lease Advisory
Commercial lease negotiation requires experience and market knowledge. Property Perfected represents landlords in lease negotiations across NJ and NYC. Contact us for a free portfolio analysis and learn how we maximize your commercial property returns.
