How Commercial Leasing Works

Put Simply

Commercial leasing works very differently from renting an apartment: there's no standard lease, no rent control, and almost everything is negotiable. It starts with a landlord listing available space. A tenant (or their broker) tours the space and, if interested, submits a Letter of Intent outlining proposed terms. If the landlord agrees to the basics, both sides negotiate a full lease. Once signed, the tenant typically gets a build-out period before paying full rent and moving in.

From there, rent is paid monthly and the lease governs everything: what the landlord maintains, what the tenant covers, what happens at renewal, and what it takes to exit. Unlike residential leases, commercial leases are long, often 3 to 10 years, with terms that lock both sides in for years. Getting the lease right at the start matters far more than in any residential scenario.

The CCIM Perspective

Commercial leasing is a multi-party negotiation with significant economic implications for landlord and tenant alike; the outcome of which affects property value, total occupancy cost, and business flexibility for years or decades. The process moves through predictable stages, each with distinct leverage dynamics and risk management considerations.

Market Survey and Space Selection: The tenant (through their representative) or the landlord's broker identifies available options and analyzes size, configuration, location, asking terms, and competitive alternatives. The existence of genuine alternatives is the tenant's primary source of negotiating leverage. Without competitive options, landlords have little incentive to move from asking terms.

LOI Negotiation: Key economic terms are agreed upon in principle: base rent, term, TI allowance, free rent, rent commencement, and option rights. The LOI establishes the framework both parties will hold to during formal drafting and prevents deal failure from re-trading economic terms in the contract stage.

Lease Drafting and Negotiation: Full lease documents are prepared on the landlord's standard form and negotiated by both parties' legal counsel. Material provisions include: expense allocation structure, permitted use clause, exclusivity provisions, assignment and sublease rights, renewal and expansion options, SNDA and estoppel certificate requirements, holdover provisions, and default and cure procedures. Each of these provisions carries economic consequence that an experienced advisor quantifies before advising acceptance.

Effective Rent Analysis: The rational comparison of competing lease offers requires discounting all cash flows, including base rent, free rent, TI allowance value, and estimated operating expense obligations, to a net present value per square foot. A lower headline rent with no TI allowance is frequently a worse economic outcome than a higher headline rent with a meaningful improvement package. Advisors who work only from the base rent number are not doing the analysis.

Commission Structure: Both the landlord's listing broker and the tenant's representative are typically paid by the landlord, calculated as a percentage of total lease value (aggregate base rent over the term), split between cooperating brokers. This makes professional tenant representation economically free to the tenant, and not using it means walking into a negotiation without an advocate while the other side has one.