There are stark differences between commercial and residential real estate. To begin with, commercial real estate deals with space for business operations while residential is exactly that, living spaces. In Nairobi, there are places where residential properties can be turned into commercial spaces or used for both. Things run a little differently in commercial real estate than they do in residential. As a person who is only used to renting spaces to live in, you could get baffled by the red tape and formality of commercial real estate. Even things like utilities are handled differently in commercial real estate. Below are some pointers to help you understand renting commercial space.
1. Goodwill
This is a number attached to a business’ good reputation. You will almost always be required to pay an amount for goodwill. Please note that this amount is different from a deposit. A deposit is refundable at the end of tenancy while goodwill is not. When a landlord quotes an amount for the goodwill, it denotes how much they think that specific location is worth to your business. They are putting a price on something intangible. The goodwill in some of the popular buildings and those in town is actually quite high. In some cases the goodwill will be way more than the rent and deposit combined. The more goodwill you are charged the more you should expect the location to work for your business. Usually, new buildings charge a little less goodwill than the older ones. You can predict whether goodwill will be high by looking at the age of the building as well as placement.
2. Rent review
Rent review is a term in rental agreements that stipulates that the rent will be examined and maybe even changed. This rent review is scheduled after prescribed periods. Often the rent review will be scheduled for the end of the contract duration. Others will want to review every two years. Others will say that the landlord reserves the right to review at their discretion. The latter is a dangerous term to agree to. In most cases it is done after five years. This section on the agreement will include something called an inflationary increase. After a few years the agreement will stipulate that the rent will be increased by a certain percentage. Residential rental agreements may have this kind of term but it is usually just a mere formality. Rarely are they exercised.
3. Trade fixtures
It is expected that when a tenant commits to s pace they will make changes. These are things like shelves and cabinets that you might need for your business. For example, a supermarket will need shelves and aisles. The space will obviously not come fitted with those. Commercial property landlords will usually be on board with whatever the tenant would like to do. This is as long as the changes are not structurally radical. This is not a standard term in residential rental agreements as there is no need for fixtures in a residential house. However, it is necessary in commercial rental agreements. This term allows the tenant to understand that they are allowed to make whatever changes necessary for their business but also understand the limits to their authority.
4. Measurements
When looking at residential property you look for how many bedrooms there are and how they describe the kitchen so you know its size. However, in commercial real estate units are described by their metric measurements. It can be hard to discern exactly how much space you need. You might have to visit every potential space so you can get a sense of the size. Some spaces might be the right size but also weirdly shaped such that planning a workable floor plan proves difficult. In some cases like in malls the rent is charged by square meter.
5. Length of lease
This is a period during which the current contract will be active. After the mentioned period one will be required to renew their contract or move out. This term is found in both residential and commercial real estate. However, it is taken more seriously in commercial real estate. At the end of the contract duration there might also be a rent review. It is advisable that given a choice between different contract lengths, you should pick the shortest. It gives you some control and room for change especially if it is a new business. New businesses often need revision of operations after a while. The landlord might decide not to let you renew your contract anyway. The end of that contract should also be a time for you to think about relocating your business.
6. Business environment
This is an important concept to understand. The business environment is the quality of business support in the vicinity. It is the amenities close to the building that could help your business thrive. It is the kinds of businesses in and around the building that could compliment your own. It is the aesthetic appeal of the business that could help with the image of your business. For example, you will want to open an auto spares shop in an area with many garages. A cosmetics and beauty products shop would do well in a place like Kenyatta market. The location of your business will be a big determinant of the personality and image of that business. You must therefore find a building where your business is more likely than not to thrive.
Understanding the ins and outs of commercial real estate transactions and the standard terms of renting should help you make the right decisions. It should also help you ask the right questions so that your decisions are well informed. If you are a newbie, it will help to do your research and perhaps even find someone who can help you through your first commercial rental process.
