Read the Fine Print Before You Sign a Commercial Lease
Here are six commercial lease line items to identify for and negotiate.
The per square foot rent is only the entry fee in most commercial leases. The fine print can make the tenant responsible for additional unplanned expenses. It is vital to the success of the business to be able to calculate all the costs related to the lease prior to executing this legally binding document…
The lease is drafted by the landlord for the purpose of protecting his/her interests, not the interests of the tenant. Be prepared to negotiate the terms and conditions in the agreement that do not match the needs or your budget of the company. Execution of the lease will obligate the company and its major stakeholders to a long term financial commitment that can affect the profitability of the company. Seek the advice of an unbiased professional, a real estate attorney, an accountant, or a financial consultant, who can guide you in the lease negotiations.
The following tips will assist you with the process. Request a Letter of Intent (LOI). This document is not a legally binding document but should outline the major terms and conditions of the lease agreement. If items are not clearly defined, ask for clarification. You can negotiate and make revisions to the LOI prior to signing the finale lease agreement.
If you plan to seek financing for the expansion of your business, ask the perspective lender if he or she will commence the loan process with the LOI, assuming you will have an executed lease prior to loan closing. Do not sign the lease until you have the availability of all the funds needed for the lease, including security deposits, funds for capital improvements to the premises, and working capital to meet the increases in operating expenses until breakeven is achieved,
Six specific line items in the LOI and lease to look for and negotiate:
1. Pass thru of operating expenses (Common area maintenance- CAM)
All the lines items to be included in CAM should be itemized and the landlord should provide a schedule of the current operating expenses. Does the lease specify that the tenant pay a pro rata share of these expenses or does the tenant pay increases in expenses over a base year? Clarification is important. Watch out for items such as management fees, insurance, structural repairs, replacement of a/c and heating units, being included in CAM. Check out the condition of the property before you are legally bound to make these improvements to a property that is not in good condition at the time of lease negotiations.
2. Real Estate Taxes – What to look for—
Does the property’s current assessed value reflect all recent improvements, or will the property be reassessed because of a change in ownership? If the property is sold to a third party during the term of the lease will the tenant be responsible for an increase in taxes due to the sale of the property? Are the real estate taxes paid by the tenant based on increases above the base year of the lease or are they calculated on a pro tata share of the taxes?
Understanding and addressing these issues before signing the lease is of utmost importance.
3. Do you plan to make improvements to the property?
Make certain you have cost estimates based on architectural drawings, for all improvements you plan to make to the property. Does the local municipality require permits? Will you need to have a Certificate of Occupancy (C of O) to open your business? If these are local requirements the tenant should not commence rental payments until the work is completed and there is a C of O from the local authority. You should try to get the landlord to make the improvements and deliver the premises ready for use.
If major changes will be made to the leased space and the tenant is responsible for those changes, the landlord should agree to long term extension options that the tenant can exercise at will.
4. The Lease term
If you are seeking funding from a lender for this business expansion that will include capital improvements, the term of the lease, including lease extensions, must match the term of the loan.
5. Lease Guarantees
Most leases require a guarantee signed by the business along with personal guarantees of stakeholders with 20% of more interest in the company. This guarantee should be included as a liability on a personal financial statement.
6. Other minor line items to be addressed:
adequate available parking and charges relating to parking for staff and clients, extended hours of operation, and special signage. Don’t execute the lease until all your concerns have been discussed with management and not solely the broker who was hired as the rental agent for management. Don’t let your enthusiasm override your negotiating skills. Signing a bad lease can destroy a solid company. Once you are able to fully understand the lease terms and are able to comprehend the financial commitment in absolute dollars, you should make a comparative analysis considering ownership vs. leasing a property.
This option should be discussed with an unbiased professional to determine what is best for the company and the company’s major stakeholders.
Related content:
Decided on a Business Lease? 20 Lease Provisions
Small Business Owners Need Advocates for Commercial Lease Negotiations
