How to Choose Commercial Space: What the Lease Tells You Before You Sign

The decision most tenants make without enough information

A commercial space search typically works like this: you tour several spaces, narrow it down to two or three options, compare the quoted rents, and choose based on location and price. The lease arrives a few weeks later. By then, you have mentally committed to the space, the landlord knows it, and your leverage to negotiate the terms is at its lowest.

The better approach is to treat the lease terms as part of the space evaluation — not as paperwork that comes after the decision. Two spaces with identical quoted rents can have wildly different true costs once you factor in load factor, CAM structure, permitted use restrictions, and term length risk.

This guide covers five lease-level factors that should influence your space decision, plus what to look at in the letter of intent before you go deep on lease review.

1. Rentable vs. usable square footage: the load factor trap

Commercial rent is quoted in rentable square feet, not usable square feet. The difference matters because you pay for rentable square footage but can only occupy usable square footage.

The gap between the two is called the load factor (also called the add-on factor or loss factor). It represents your proportionate share of common areas in the building: lobbies, hallways, restrooms, mechanical rooms, and shared conference spaces. A load factor of 15% means that for every 100 square feet you rent, you can use about 87 of them.

How load factor affects your actual cost per usable foot

Two spaces can have the same quoted rent per rentable square foot but very different costs per usable square foot depending on their load factors.

Both spaces cost the same per rentable square foot. But Space B delivers 224 fewer usable square feet for the same annual cost. Over a 5-year lease, you pay $26,500 more for space you can never occupy.

Load factors in multi-tenant office buildings typically run 10–25%. Single-tenant buildings and industrial spaces often have lower load factors. Retail spaces vary significantly based on how common areas are defined in the lease.

2. Permitted use: confirming the clause matches your business plan

The permitted use clause is one sentence in the lease that defines every activity legally allowed in your space. It sounds administrative. In practice, it controls whether you can pivot your business, expand your product mix, or sublet the space if you need to exit.

Landlords write permitted use clauses narrowly by default. A bakery tenant might receive language that reads “retail sale of baked goods and coffee beverages.” If that business adds prepared sandwiches, hosts occasional events, or wants to wholesale product, they may be in technical default of the permitted use clause — even if nobody notices for years.

The subletting problem

The permitted use clause is also your ceiling for subletting. A subtenant must operate within the scope of your permitted use. If your permitted use clause says “retail sale of women’s apparel,” you cannot sublet to a coffee shop, a fitness studio, or a home goods retailer. In a soft market where you need to exit the space, a narrow permitted use clause dramatically limits your options.

Broader language like “retail sale and display of merchandise and related ancillary uses” or “general office use for any lawful business purpose” gives you room to operate without constant exposure to technical default.

3. CAM structure: what you will actually pay in year 5

Common Area Maintenance charges are the portion of building operating costs passed through to tenants. In a triple net lease, you pay your proportionate share of property taxes, building insurance, and maintenance. In a modified gross lease, some of these costs may be included in the base rent. In a full-service gross lease, the landlord absorbs them entirely.

When comparing spaces, most tenants look at the quoted CAM rate for year 1. That number is almost meaningless without knowing how fast it can grow. An uncapped CAM clause at $6/sqft in year 1 can reach $9/sqft by year 5 at 8% annual growth — a 50% increase that never appeared in any comparison you made when choosing the space.

Three CAM questions to ask before you choose a space

• Is there an annual cap on CAM increases? A 5% or CPI cap on controllable expenses (maintenance, management, landscaping) limits your exposure. Property taxes and insurance are typically excluded from caps, but the controllable portion is where the 8–10% annual growth happens.
• Are management fees included on top of operating expenses? Some leases allow the landlord to charge a management fee (typically 10–15% of operating costs) as a separate line item on top of the CAM total. This compounds the CAM growth significantly.
• Is CAM estimated upfront and reconciled annually, or fixed? Most NNN leases use estimated monthly CAM payments with an annual reconciliation where you either get a credit or owe more. Fixed CAM (no reconciliation) is simpler and eliminates surprise bills but typically comes at a higher base rate.

If you are comparing an NNN space at $24/sqft base + $7/sqft CAM against a modified gross space at $33/sqft all-in, model both over five years before assuming the NNN is cheaper. The LeaseLens lease cost calculator lets you model both scenarios with escalation and CAM growth side by side. See also the full guide to CAM charges for how to evaluate a CAM clause.

For a full comparison of what gets included in each lease type, see all 5 commercial lease structures explained.

4. Lease term vs. business certainty

Landlords prefer longer lease terms because they lock in cash flow and reduce vacancy risk. They will offer better economics — lower base rent, more tenant improvement allowance, free rent periods — in exchange for longer commitments. For established businesses with predictable space needs, this trade makes sense.

For businesses with uncertain trajectories — early-stage companies, businesses entering new markets, or businesses that may scale headcount quickly — a long lease without exit rights is a serious liability. Every month of remaining rent on a lease you cannot exit is real money owed, and most commercial landlords will pursue it.

How to get the economics of a long lease with the flexibility of a short one

The answer is usually a combination of two negotiated provisions:

• Early termination clause. A right to exit the lease after a defined period (commonly 24 or 36 months into a 60-month lease) by paying a termination fee — typically 3–6 months of base rent plus unamortized landlord costs. This costs the landlord something, so they will often want a longer initial term before the termination right kicks in. See the full guide to early termination clauses for how to structure the negotiation.
• Renewal options at defined rent. A right to renew at the end of the initial term, with the renewal rent tied to CPI or a fixed percentage increase (not fair market value at the landlord’s discretion). This gives you flexibility at the back end while letting the landlord count on the initial term. See the guide to renewal options for what to negotiate on rent-setting method.

5. What to evaluate in the letter of intent

The letter of intent (LOI) is the document that precedes the lease. It is typically non-binding on most terms, but it sets the baseline for lease negotiations. Once you sign an LOI, it is psychologically harder to move significantly from those terms — and landlords know it.

Most tenants treat the LOI as a formality and focus their attention on the full lease. That is a mistake. The LOI is where you establish the headline terms, and the leverage to negotiate them is higher before you have signed any document than after.

Six terms to nail in the LOI before lease drafting begins

• Rent and escalation method. Specify both the starting rent and the escalation mechanism — fixed percentage, CPI, or fixed-dollar bumps. “Annual increases at 3% or CPI, whichever is lower” is a common tenant-favorable phrasing. If it is not in the LOI, the lease draft will include whatever the landlord’s template provides.
• Tenant improvement allowance. The LOI should state the TIA amount, what it covers, and the general timeline for completion. Leaving this out of the LOI invites the landlord to reduce it during lease drafting when your leverage is lower.
• Free rent period. If you are negotiating a free rent period (1–3 months is common in most markets), establish it in the LOI. Free rent is a landlord concession; once they have agreed to it in the LOI, it is difficult to walk back.
• Renewal option structure. The number of options, term length, and rent method should be in the LOI. Once in the lease, the landlord’s template renewal clause often uses “fair market value at landlord’s discretion” — a renewal option that is not actually useful.
• Permitted use scope. Ask for broad language in the LOI. It is easier to establish a general permitted use category before lease drafting than to negotiate out of a narrow clause that already made it into the draft.
• Exclusivity protection. If you need exclusivity (preventing the landlord from renting to direct competitors in the same property), establish it in the LOI. Exclusivity clauses are rarely added after the lease is drafted unless they were established as a condition of the deal. See the guide to exclusivity clauses for how to define the protected category.

Beyond these headline terms, the LOI often does not address holdover rates, personal guarantee scope, subletting consent standards, or CAM caps. These are lease-level negotiations — but knowing what the LOI establishes versus what is left open helps you prioritize where to focus when the lease draft arrives.

Before you commit to any space: the pre-signing checklist

Once you have identified the space you want, run through these checks on the draft lease before signing anything — including the LOI.

• Calculate the effective cost per usable square foot (not just per rentable square foot). Confirm the load factor is within normal range for the building type.
• Model the year-by-year total cost including CAM escalation. Compare spaces on total 5-year cost, not year 1 rent.
• Read the permitted use clause. Confirm it covers your current business and a reasonable range of pivots.
• Check whether there is a CAM cap on controllable expenses. If not, ask for one before lease drafting proceeds.
• Confirm the lease type — NNN, modified gross, or full-service gross — and what is included versus passed through. See commercial lease types explained for a comparison table.
• Ask about early termination rights, especially if your business situation has any uncertainty over the lease term.
• Review the holdover clause. Holdover at 150–200% of base rent with no cure period is standard in first drafts and is negotiable. See the guide to holdover provisions for the specific language to request and what to expect from landlords on cure periods.
• Clarify personal guarantee scope before the lease is drafted. A full-term personal guarantee on a 7-year lease is materially different from a 24-month guarantee with a burn-off. See the guide to personal guarantees for negotiation options including burn-off clauses and good-guy provisions.
• Confirm the security deposit amount and the conditions under which the landlord can withhold it. A deposit equal to 1–3 months of base rent is typical; the conditions for deductions should be specific, not open-ended. See the guide to commercial lease security deposits for what is negotiable and what language protects your deposit at the end of the term.

The LeaseLens lease negotiation checklist covers all ten of these items with the exact language to request for each. Use it alongside your lease review to track what you still need to negotiate before signing.

Common questions about choosing commercial space