What does renting commercial property mean?
A commercial lease is a legally binding contract. It’s an agreement between the property owner/landlord and the tenant/renter to use commercial property.
Typically, a commercial lease includes the details of your agreement, including terms such as rent, lease duration, deposits and other mandatory costs.
Should a business be renting commercial property?
It depends on your business needs and how you’ll use the space.
Advantages of renting commercial property include:
- Flexibility: You don’t have to commit to being a property owner, which can be less risky as a business owner.
- Lower costs upfront: You don’t have to come up with a down payment if you’re already strapped for cash.
- Ability to change locations: Location can be everything for some types of businesses. The ease of renting means relocating is easier, and you can move away at the end of the lease if you find yourself in the wrong spot.
The disadvantages of renting commercial property include:
- You can’t build equity: Your business can grow and turn a profit, but if you don’t own the building, you’re not building real estate equity over time.
- Higher monthly payments: Rent is often more expensive than a mortgage, so you could end up paying out more each month.
- Your business can lose its space: A commercial lease renewal is never a guarantee. You may have to move at the end of your lease and cannot depend on your business staying in the same location.
Which insurance is required for renting commercial property?
Most landlords require tenants to have commercial rental insurance. Not only do they want to protect their property, but they also want the coverage and protection that commercial business insurance can offer to help business owners pay rent if there’s an accident, injury, burglary or other mishap. Check your lease for specific requirements.
General liability insurance
The most common form of insurance that a commercial landlord may require is general liability. It can help to protect against third-party injuries or property damage.
Here’s an example of general liability insurance at work: A customer slips and falls on a wet floor at your coffee shop. They’re injured and need surgery and rack up tens of thousands of dollars in medical costs. If they sue you for their medical expenses, and you carry general liability insurance, your insurance provider may help to cover the claim.
Commercial property insurance
Commercial property insurance is a type of insurance that can provide financial protection for business property in the event of covered damage or theft. It can help cover the cost of repairing or replacing the property so the business can continue its operations.
Many landlords also require business interruption insurance. This form of insurance can help cover the income lost from closing a business to make repairs. This could help the tenants meet their financial obligations, such as paying rent and other bills, even if their business operations halt temporarily.
NEXT includes business interruption coverage within its commercial property insurance coverage. This way, tenants have comprehensive protection that can help cover both property damage and the financial consequences of business interruption.
Business owner’s policy (BOP) insurance
A business owner’s policy, also called a BOP insurance policy, combines all of the coverage of both general liability and commercial property insurance into a single, more efficient and comprehensive package.
The beauty of a BOP is that it can carry more protection than just a single policy. It can help cover damage that you or your employees may inadvertently cause to another person’s property, as well as bodily injury accidents that injure patrons or passersby to your business.
BOP keeps going to help protect your business inventory in the event of a fire or water damage or other covered event.
And its arms reach out to cover business income interruptions; advertising injury if you’re accused of infringing someone else’s copyright in your advertising, libel, or slander; and some court and legal fees if you need an attorney for a lawsuit. In short, a BOP can do a lot.
Other insurance for renting commercial property
A landlord can require you to get any insurance that protects their property and your ability to pay rent. Here are a few more types of coverage that a commercial rental agreement or lease may require you to hold:
What does renting commercial property cost?
Many variables go into the cost of renting commercial property, including geography and location. Average rents range from $10-$25 per square foot. It’s best to compare prices per square foot in your area.
When calculating your total monthly costs for a business space, consider other added costs such as property taxes, business insurance and renovations or structural updates.
In commercial property rental, it’s common to negotiate lease terms and costs with your landlord.
4 steps to renting commercial property
Here’s what to expect when renting a commercial property.
1. Identify the property characteristics you require
List your must-haves and nice-to-haves to seek a business location. Here are a few key questions to answer about your business when deciding on your ideal location:
- Do you need to be near complementary businesses? For example, should your bookstore be near a coffee shop?
- Is there an adequate employee talent pool nearby?
- Does your ideal customer frequent the area?
- Is the location zoned for your type of business?
- Can you fulfill customers’ needs with restrooms, parking and security?
- Do you have enough room to expand?
- Does the layout fit your type of lease?
Few locations are perfect, and you may want to make modifications. Consider the cost of these modifications and compare it to your total lease price.
Take into account the upfront work to open for business, utilities, maintenance costs, fees and clauses in your lease about increases. Be sure to shop around and read the fine print.
2. Get a commercial real estate broker
You may not be able to store equipment or host events at your commercial property. But did you even think to ask? A commercial real estate (CRE) broker can help you ask the right questions.
Don’t rely on the property owner’s listing agent. They can assist you, but they’re looking out for the property owner’s best interests.
Hire a CRE broker for their experience. A tenant broker can help you to:
- Find listings
- Obtain accurate data on the property
- Help you to understand market pricing and financing options
- And offer first-hand local, neighborhood knowledge
You want knowledgeable professionals on your side for a walkthrough, to dig into a landlord’s history, and read (and explain) the fine print on the lease.
3. Examine types of leases
Read your prospective lease carefully before renting a commercial property. The two main categories of leases for commercial spaces include:
- Full-service lease. In this arrangement, the landlord is responsible for maintaining the property, including costs associated with utilities, repairs, taxes, insurance and janitorial services.
- Net lease. Here, you (the tenant) pay a lower base rent, but you may be responsible for some of the costs associated with the property, such as insurance and maintenance.
No lease will fit neatly into one category, so be sure to read the details.
4. Make an offer
To submit an offer, you or your CRE broker will negotiate the terms and prepare a letter of intent (LOI). The LOI describes your business, why you would make a good tenant for the space and the terms you want.
Once both sides agree to the LOI, a formal lease is signed.
How is renting commercial property different from residential?
A new business owner renting commercial property for the first time will notice some differences between renting commercial and residential property. The process may feel familiar to renting a residential property, but there is often a layer of added complexity.
At its core, renting commercial property is comparable to residential renting. You form an agreement with a property owner to use a space. But here are some of the main differences:
- Commercial leases are longer than residential ones — usually 3-5 years.
- Commercial leases allow you to conduct business in a space. Residential leases may prohibit this.
- Commercial renters commonly pay for extras like property taxes and insurance.
How NEXT helps small business owners rent commercial property
NEXT has helped hundreds of thousands of businesses in 1,300 professions get just the coverage they need. We make putting together your business insurance plan easy with 24/7 access to manage your coverage.
Start a quote, customize your options and access your certificate of insurance online immediately — all in about 10 minutes.
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