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.

Next page- Commercial lease line items to negociate