Here are 12 clauses in a commercial lease that should be examined with care.
At the start it's imperative to find a trustworthy real estate professional who does not have a beneficial interest in the negotiations.
It should not be the real estate broker who will earn a commission from the transaction, or the management company who receives compensation from the landlord or the construction company who is hired to complete the tenant work and benefits from changes and cost over runs.
Often the contractors and subcontractors have long term relationships with the landlord. Don't ask your family attorney to review the lease if he (or she) is not a commercial real estate specialist familiar with the local real estate market.
Currently the real estate market in many major cities favors the landlord.
It is a matter of supply and demand and when there is less supply than demand the landlord can structure terms that favor his interests. In some cases, a long term lease is not favorable to his interests, but an owner of a business that is relocating wants to be assured that he has options in the lease that allow him to remain at the subject location for an extended term.
The small business owner needs an advocate that is looking out for his interests and makes certain that the small print in the lease works for the tenant as well as the landlord.
Real estate attorneys
Real estate attorneys are sometimes retained to review legal matters to ascertain compliance with local and state laws, but unfortunately, they are not asked to review the business terms, nor are they always up to date on the terms and conditions of leases in each market for each type of property.
It is not merely the rental rate that determines the costs relating to leasing. How can a tenant be certain that the small print in the lease will not negatively impact the profits?
Often the owners seek a consultant or a mentor after they have executed a long term lease.
This is a serious error. A qualified consultant takes an impartial view and does not allow the excitement of starting off a new business or relocating to a new location to impact the signing of a lease. Leases can be 50 pages or more, with fine print, and terms that have future impact on the cash flow of the business.
Many small businesses end up working for the landlord because they did not review the clauses that relate to increases in tenant costs throughout the term of the lease.
When they receive notice of rental increases in accordance with the terms of the lease, they think about corporate dissolution, but in most cases the leases require personal guarantees. Any default affects personal credit scores and the ability to borrow funds at favorable rates.
Leases are written by landlords to protect the landlord’s interest - not the interests of the tenant. SBDC consultants offer educational workshops and one-on-one counseling to educate the small business owner in order to avoid the pitfalls that can occur when all the terms and conditions in a lease are not reviewed and analyzed.
Here are some of the twelve clauses in a commercial lease that should be examined with care:
1. What is the rent per square foot (p.m.)?
Is it in line with the current market rents – for comparable properties in the local area? Is the n.r.s.f. accurate? (n.r.s.f. is not the same as usable s.f.) What is the loss factor in the building? Every building has common areas including halls, bathrooms elevators and other public areas. How are these common areas factored into the usable space?
2. What is included in CAM? (Common Area Maintenance)
Does it include waste removal, utilities, insurance? What is NOT included? Is the cost of marketing, insurance, and management a part of the CAM that is passed on to the tenant?
Next- Commercial lease clauses 3 through 12
About the author
Marjorie Weber has been educating entrepreneurs and guiding them in their search for capital for the past 16 years: combining business training programs with one-on-one mentoring. Marj is currently a financial advisor for Florida SBDC at FIU. She was Chair of SCORE Miami Dade from 2010 to 2014. She also serves as an advisor to the Goldman Sachs 10,000 Small Business Program and the SBA Emerging Leaders Program and provides training for Veterans seeking an entrepreneurial path upon retirement from the service. She has been facilitating workshops under the auspices of Miami Bayside Foundation for the past 3 years. She commenced her career as a real estate investment banker in New York and Miami.She uses these long term relationships to assist her clients in accessing capital. She knows both the process and the people and has assisted in providing financing for hundreds of businesses in Miami Dade.