8 Key Components of a Solid Commercial Real Estate Lease Proposal

This article was adapted from the book Industrial Intelligence.

If you’ve located an industrial site to be the new location of your company’s operations, your first step to getting a deal done is a lease proposal. Keep in mind, this is not a contract. Rather, it contains the major business points that need to be agreed upon before an actual contract can be negotiated upon and signed. 

You might be wondering exactly what goes into a lease proposal. The rest of this article will detail the eight key components you’ll need to know about.

Parties

The parties are the trade names, or official legal entities, for both the landlord and the tenant. It is essential to communicate who will be on the lease so there is no ambiguity: will it be a principal of the company, a newly set up corporation, a subsidiary, or a corporate parent? Landlords want to make sure your financials match the entity, as well as verify the corporate officers in charge of signing the lease. 

Property Address

This one is self-explanatory. On the odd occasion, a broker might need to change the property address number, letter, or suite based on client preference. This is surprisingly possible and less difficult than one would expect, provided the United States Postal Service and local fire authority are on board. Regardless, this is not a huge area of concern.

Premises Size

This is the approximate size of the building in question. Some people will get caught up in the exact measurements of the building, but building square footage is always an approximation.

If you hired five different architects to measure the building using industry standards, you would likely get five different numbers. You must rely on the fact that the space is adequate for your business operations and that the total amount of square footage is approximate and reasonable. 

Lease Commencement Date

This is the date when you will formally take possession of the property and start paying rent. The lease commencement date is equally important for the landlord, as they have to guarantee completion of any tenant improvements or construction at this time, or they incur penalties. Understand that this date is not the same thing as early occupancy or free rent.

Lease Term

This is the length of time you want to be able to utilize the property. While it is customary to lease for full years at a time, do not worry about asking for a specific lease expiration month if it works better for your business and makes for a less disruptive time to move. Landlords are usually empathic and accommodating when it comes to this type of request.

Lease Rate

The lease rate is quoted per square foot, per month in Southern California, Houston, and a handful of other markets, and per square foot, per year everywhere else. In certain markets, such as Seattle, they quote lease rates differently for the office portion and the warehouse portion of the space. You will always want to know if your lease includes any of the property operating expenses in it. 

Lease Type

Although several lease types exist, the most common variations are gross, modified gross, and triple net.

The gross type means rental payment includes not only payment for rent, but also property tax, insurance, and common area maintenance expenses. This is typically found with older, privately held landlords.

Modified gross is a rental payment that includes all the same items as the gross lease, but excludes common area maintenance.

A triple net lease rental payment only includes rent. Property tax, insurance, and common area maintenance are paid separately. Items included in the other lease types are considered operating expenses.

Lease Rate Adjustments, Escalations, and Annual Increases

This section describes how much rent will increase each year. The general idea is that the base rate should adjust every year to keep up with inflation. In practice, this is subject to supply and demand market dynamics at the time of the negotiation. 

Pay close attention to this section, as many people don’t realize how much rent can increase in rapidly fluctuating markets.