Your commercial lease: valuable tips
It’s exciting to move your business into a shiny new space, but knowing how to negotiate for that space is surprisingly complicated. And if your entrepreneurial concept is going brick and mortar for the first time, you have, metaphorically speaking, lots of ground to cover.
Some commercial space leases run into hundreds of pages, so it’s easy to miss something important. Before you sign, know your responsibilities as a tenant and be sure you’re covered in case the roof needs to be replaced or the air conditioning unit goes out. A properly negotiated lease will protect you on many fronts.
Keep in mind that commercial leases are calculated by the year, so a 1,200-square-foot space may rent for $50 per square foot per year, but that translates to a lease of $5,000 per month. As a business owner, you probably already know how much rent you can afford based on your annual sales. If your monthly revenue is $50,000 and your industry typically allots 10 percent toward rent, you may be in the ball park.
Your broker will help you with rent calculations and what similar tenants are paying in the area. And when hiring a commercial real estate broker to help you, be careful not to use a broker who also represents your potential landlord. Since the landlord pays the broker’s commission, there could be a conflict for you, the “smaller client.”
Next is your letter of intent to the landlord, spelling out what space and what amount of rent you are willing to pay, among other issues. The negotiations usually begin at this point and will include the following items.
The term: Commercial leases can run from 3 years to 25 years, with options for renewal, but this is completely negotiable. If you own a high-end spa, you don’t want to build out an expensive store and only have a three-year lease. Make this provision work in your favor.
Use of space: A clause allowing for “all legal uses” will be helpful if the scope of the business changes and expands.
Start date: If you’re building out your store, it’s best to start paying rent when it’s ready for you to move in.
Percentage clause: You may be familiar with rent guidelines, wherein a grocery store usually pays 2 percent of its gross sales to its landlord, a laundromat can pay 12 percent, etc. Your broker can negotiate a percentage rent clause that may state that as you make more money, your rent will increase.
Kickoff clause: In case your sales don’t pan out, this clause allows you to exit the lease after a certain amount of time.
Tenancy agreement: If you are looking at a site because a major retailer is next door to your shop, this clause allows lower rent or other concessions if they move out.
Tenant improvements: Your broker should know what incentives landlords are giving in your desired area, and if you don’t need any improvements, perhaps the landlord will give you several months of free rent instead.
Exclusivity clause: You certainly don’t want a competing pizza parlor or salon in the same shopping center, so be sure to include this provision.
Personal guarantee: Unfortunately, most landlords will require some type of personal guarantee from you in case your sales fall flat. At least try to limit your exposure to only a few years.
CAM or common area fees: You will pay a share of the building’s or shopping center’s maintenance. The cost of keeping the common areas clean, manicured, landscaped, secured, lighted, etc. is divided among the tenants according to how much space you rent. You can try to negotiate up front for a fixed rate so your CAM won’t increase if tenants leave; a cap on increases, for example, no more than 3 percent per year; or a flat refusal to pay any CAM, since this is a very profitable way for a landlord to make money.
Additional clauses to consider might be a sub-lease provision that permits you to lease your space to another business, in the unhappy event that your business doesn’t thrive in that location, or default provisions regarding lock-out or eviction processes. While your business plan is positive and optimistic, there should always be a Plan B if an economic downturn or other circumstances create the necessity to leave the premises.
After you reach an agreement, a formal lease will be drawn up. Some business owners use their personal attorney to review it and work with the landlord’s attorney. Be sure your attorney, whoever she is, is familiar with real estate law and get their cost up front. Some charge more than $10,000 for a lease.
Keep in mind that this document will be paramount to your business as long as you are in business, so choose both your broker and your attorney well. And good luck with your dream! HLM
Sources: huffingtonpost.com, legalzoom.com, quickbooks.intuit.com and sba.gov.