For businesses just starting out, one of the biggest expenses may be office space, a storefront, or an office rental in an industrial park. Few start-ups have the resources to buy their commercial space and buying, for a business with an uncertain, unpredictable future, may not be the best idea.
So, the next option is leasing commercial space. Here are some tips to consider before you commit to your commercial space, wherever it may be.
1. Don’t accept vague, verbal guarantees from a prospective landlord. Get it in writing. That landlord may tell you, “Oh, don’t worry about that clause, we never enforce it.”
If it isn’t in writing, it isn’t usually defensible in the event of a lawsuit. Get everything in writing and have the lease reviewed by a business broker, your company lawyer, and your bank to identify areas in which your business may be exposed to risk in spite of a proposed lease agreement.
2. The term of the lease is the amount of time the lease agreement between landlord and business owner will be in effect. The federal government’s Small Business Administration (SBA) recommends a one- or two-year lease term with options to renew.*
The SBA also recommends that your commercial lease indicate rent increases that are scheduled to occur when the lease comes up for renewal. The initial term of the lease may be affordable, but without knowing the cost of your space upon renewal, your company may find itself forced to move to avoid a big jump in monthly rental costs.
Talk to a business broker who can work with the landlord to negotiate beneficial terms for your fledgling business, and these commercial space professionals may be able to recommend legal counsel that specializes in commercial lease negotiations.
3. Who pays what? A commercial lease agreement may be a simple, one-page document, or it can be a thick book of fine print, with some of that fine print potentially impacting your business’ bottom line.
Some commercial leases provide a list of additional expenses charged to your business above and beyond the actual rental cost of the space itself.
Additional expenses may include:
- Common Area Maintenance (CAM) fees to maintain common areas shared by other businesses within the same mall or commerce park;
- Utility costs for your space and common areas;
- Maintenance and repair of your rental space, including maintenance of plumbing, HVAC, electricity and other undetermined expenses;
- Cleaning fees, usually assessed when you move out of your commercial space to bigger quarters or a new location.
Determine how common fees are assessed, i.e., by the amount of square footage you lease, location within the mall, number of loading bays – each lease may be a little different. Just make sure your start-up isn’t being hit with common fees that are out of line with other businesses that share the same strip mall or commerce park.
4. Don’t allow your lease to be subordinated to the lease of the commercial space’s anchor businesses. Mall developers often cut sweetheart deals with large anchor stores that, in essence, give these large, brand name customer magnets veto power over what you can and cannot sell.
5. Read the entire lease – even if you need a magnifying glass to read the fine, fine print. Landlords sometimes add clauses that can have a negative impact on your business growth – everything from assessments for property improvements to the actual number of pizzas your shop can sell before violating the terms of the lease.
Once again, talk to a lawyer familiar with commercial rentals to make sure you understand exactly what you’re agreeing to when you sign that lease.
6. Have your banker review the lease. Some banks may not lend operating capital or offer a business line of credit to a business that is locked into a lease prohibiting it from finding a new business operator in the event the business defaults on a business loan. This may or may not put personal assets at risk. Your bank rep should be able to tell you what to expect based on the terms of the lease.
7. Don’t sign that lease without good advice. If you call your company’s legal team to review a lease you’ve already signed, there’s not a whole lot they can do about clauses that negatively affect your business. Get the advice you need from experts to help avoid potential problems, like signing a lease and then finding out you’re responsible for paying $500 a month for the marquee sign at the entrance to the mall.
You may have rented residential property, and think you understand how leases work, what can be negotiated, your obligations, limitations, expenses and other essential information. Just because you’ve rented an apartment or condo to live in doesn’t mean you understand terms set out in a commercial lease.
You have a vision of a bright future. Don’t let a commercial lease – a legal, binding document – keep you from growing your business to the max.
The information provided is presented for general informational purposes only and does not constitute tax, legal or business advice.