As a small business, you know there are a plethora of things to consider on a daily basis to keep your business running smoothly and successfully, from employees, inventory, customers, insurance needs, and business finances. The statistics are startling for small businesses and their success rate, so managing it all can feel overwhelming.
The truth is that any business will have a hard time succeeding without having the right location and commercial lease to run their business. Whether it’s office space, warehouse space, a manufacturing facility, or a brick-and-mortar storefront, finding the right location to run your business is key to your success.
The other reality is that it’s likely one of the largest line items on your business plan budget will be for your business’s rent. So, not only is finding the right place important, but it’s also important to carefully negotiate your commercial lease and get a good deal.
So, before you rush into signing a lease, read on to learn all you need to know about commercial leases and how to negotiate a good one for your business.
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Understanding Commercials Leases
As a business, when you seek a commercial space or commercial property, it’s important to understand all the components and clauses you might want to include in your lease agreement.
If you’ve ever rented residential property, you might be familiar with a rental lease. While commercial real estate might also have a lease agreement, it’s a much more complicated process.
When you rent a residential space, the landlord will dictate the lease’s expected rent and terms, and you pretty much have to comply. Commercial property leases are more of a negotiation between the landlord and tenant.
Because these lease agreements often last for longer periods of time and the tenant (your business) may want some changes made to space, they are more complex to arrange.
It’s highly advisable to work with a real estate lawyer to hammer out a commercial lease’s fine print. The fine print can be tricky, and if you don’t understand it or choose to ignore can have real consequences.
Terms to Know for Negotiating a Commercial Lease
Before considering a commercial lease or even the process involved with negotiating one, it’s important to have some understanding of the key terms involved in commercial real estate and what you might run across as you prepare to sign a lease. Let’s take a closer look at some of the key terms in commercial real estate.
Rent and Base Rent
Of course, as a business, your biggest concern will be how much your new space will cost you. You’ll hear the term base rent battered around. Base rent is the minimum rent of the rental unit, usually paid out in monthly installments. Don’t assume that will be the only amount you need to pay the landlord.
Also, most exporters would suggest two things. Make sure the base rent gets calculated around actual usable space versus total space. Also, be prepared to negotiate this amount and don’t agree to that number automatically. In fact, most set the base rent on the top of the scale for rental costs, not actually what the property is worth.
Usable Square Footage
Often buildings will have common areas. You want your rent figure based on the amount of space your business will be using exclusively.
You want to be prepared and have it as a part of your lease what kind of rent increases you might anticipate. Many negotiated commercial lease agreements will ask the landlord to cap potential rent increases to a certain percentage.
Just like in a residential lease agreement, you can expect the landlord to request a security deposit. This amount may be based on several months of rent. It may also need to get paid while you get the lease paperwork finalized. Be sure to have the security amount spelled out in writing, both the amount and what happens to the security deposit at the end of the lease.
Often in residential leases, the lease length runs from one year to the next. A commercial lease tends to be for a longer period of time. In fact, you can have some real negotiating power if you opt for a little longer lease term. More on this later.
Often commercial spaces will need modifications or improvements, so they work for your individual business. This is one area where you can negotiate with the landlord. Who is responsible for these improvements, and who pays for them?
This term is important for a couple of reasons, both fine print, and cost. Commercial leases tend to be very complicated. It’s important to read and understand all the fine print and what it means for you as the tenant. You also need to understand the bottom line as far as cost.
What are the costs that you’ll be responsible for? You don’t want any unexpected surprises that make the space too costly for your business.
Grant of Lease
This is the item in the lease that explains the landlord’s conditions to turn over the property to the tenant. Often, this is also negotiated as it may depend on work getting done on the property in anticipation of the tenant taking over.
No, this is not exactly like graduation day. It is the day the tenant actually becomes responsible for the property as they have taken it over and will be responsible for paying the rent and other expenses spelled out in the lease agreement in the future.
The landlord and the tenant can mutually agree to the lease terms and go forward with an extension on the lease. You want to be cautious that all concerns are addressed before signing an extension because it seems simpler. If you opt for an extension, both parties should sign that they agree.
If you pay rent late, the lease can outline consequences for paying late even one day late. In most cases, this includes paying a late fee. You may want to negotiate a cure period in your lease to avoid more significant consequences of breaching the lease.
The landlord can calculate late fees as a flat fee you pay because the rent is late or as a percentage of the rent.
A gross lease, kind of like your gross income, is the whole amount. It is the amount you’ll pay in rent when everything is included. This might include taxes, insurance, utilities, and any other charges that might be added to the final lease cost above and beyond the actual rent cost.
Taxes on the Property
Rarely in residential property is the tenant responsible for paying taxes on a property. This is not the case in commercial real estate. Again, this is a negotiated item in the lease. It’s not uncommon for the tenant to be responsible for some or all of the property’s property taxes.
The tenant might be responsible for property or real estate taxes. If there are special ordinance taxes or assessments, those should also be spelled out in the agreement.
Obligation for Repair
This term applies to any repairs, including defects, deficiencies, failures, or deviations that are needed. It should also spell out who is responsible for taking care of these repairs.
Permits for Repairs and Improvements
In commercial property, any time there are improvements or construction, it will be necessary to obtain local construction permits. In addition to who does the work, you should spell out who is responsible for obtaining the permits.
Indemnity By Tenant
This will be a clause the landlord may not budge on. This is connected to an insurance issue. Of course, the landlord will have their own insurance on the structure of the building.
The landlord may ask that a clause get put in place, waving them of any liability from injury, loss, claims, or damage unless it’s as a result of their negligence. More on the insurance you should carry as a tenant later.
As a tenant, you want to have a clause that will adjust or eliminate rent obligations if the property is damaged. You might want this clause for potential fire or if you live in an area prone to natural disasters.
This is a highly unique situation, but if you want to be sure your bases are covered, you want to include a condemnation clause. This would spell out what happens for the tenant if, for some reason the landlord loses the property or a government agency seizes it for condemnation or eminent domain.
Option to Purchase
This is a smart clause to include giving the tenant the option to purchase the property at an agreed-upon price should the property owner decide they want to sell. The property owner will not want this option in place during the term of the lease. It’s just always a good idea to spell it out.
What Should You Consider When Looking for a Commercial Lease?
As you enter the commercial real estate market, there are many different types of lease agreements and even properties. It’s important to understand the terms of the lease.
This will mean negotiating a commercial lease that works for you. Before you even consider the negotiation process, there are a number of things to consider. Let’s take a closer look at some of those considerations.
Look at the Area
You’ve surely heard the expression, location, location, location. It can make or break a business. You might find a great property with a location that is not the right fit.
Take your time to look beyond the structure itself and consider the area too. It will matter for your business.
Research Zoning Laws
Be sure to look into the zoning laws where the commercial property is located. It might be zoned for commercial activity. Yet, there may be limits on the types of business you can do. You want to make sure that your business and zoning ordinances mesh. Worst case scenario would be to enter a lease agreement only to find out you can’t run your business there because of a zoning restriction.
Research Nuisance Laws and Environmental Laws
Nuisance and environmental laws will place restrictions on things like equipment usage, noise, smell, and even material handling. You want to make sure none of those restrictions would prohibit you from doing the work you do.
Know Your Budget
The truth is that you can always find the perfect property if money is no object. For very few businesses, that is the case. Spend some time on your business budget before you begin looking. Be realistic about what you need and what you can afford.
Don’t allow yourself to get locked into a property you love that is really too expensive for your business.
Seek Professional Help Through the Process
While initially, it might feel like one more expense, the importance of working with an expert in commercial real estate can’t be overstated.
Commercial leases often require significant negotiation and are complicated. You want to work with someone who is well-versed in reading and understanding those agreements. A commercial real estate attorney can not only help to negotiate the deal, but they can also help decipher the long lease agreement.
Don’t Pay Base Rent
Again, commercial leases are about negotiation. A landlord is going to ask for the max they hope to get away with. Don’t pay base rent until it’s negotiated.
Make sure you know what’s included or extra beyond a month’s rent.
Check the Building Specs Yourself
Rent for commercial space is often calculated on the square footage of a property. Commercial property units change from tenant to tenant.
You want to take a careful look at the actual square footage and make sure you are getting what you’re paying for.
Longer-Term Lease Gives You More Negotiating Power
It’s ideal for a landlord to arrange a longer lease. In fact, rarely is a commercial lease only for a single year. Often leases are 3 to 5 years. While longer leases are good for the landlord, they can also be good for the tenant, assuming you negotiate a good agreement from the start.
A longer lease does give you more negotiating power too.
Ask for Free Stuff
Hey, it never hurts to ask applies here. The landlord might be reluctant to lower the rent overall simply. If the landlord has other properties or may want to rent nearby properties in the future, they may be reluctant to lower the rent across the board simply.
Some landlords incentivize tenants and get around completely lowering the rent to offer a short, free rent period. In the end, it saves you overall, and it can act as a hook for the landlord to get you into the property. You simply need to ask.
Commercial real estate laws are tricky. In some states, in fact, a landlord can opt to evict for paying rent even one day late. Everyone makes mistakes. You want to protect yourself from a potentially costly error.
You can ask that your lease has a built-in cure period. This is a short period of time for you to rectify any breach of contract before you get charged or have other consequences.
A cure period is also negotiated.
Early Term Penalty Fees
This is another fine print area you want to consider. Most lease agreements will have early termination agreements. You can understand why a landlord wants them. You can also understand why they might be bad for a struggling business.
You can negotiate how they are applied and even what they will be. This is where the advice of good legal counsel is valuable. They will know what kind of early termination fees are outlandish and which ones are reasonable if they become necessary.
In strip malls, often there might be a later big box store that brings in a larger customer base. This can be helpful for smaller businesses around them.
You can have a clause written into a contract related to the draw business. If they suddenly move, that can adversely impact your business too.
You can put a clause in your lease that prevents the landlord from renting to anyone who might be a competitor to your business from moving in too close to you.
These can be tricky and sometimes can end up being prohibitive for you too. So you want to be careful how these are arranged.
Look at HVAC
Often you get the HVAC system that comes with the building. But some landlords will want you to be responsible for the repairs to this system. This can be very costly for a small business if something goes wrong.
Make every attempt to have an HVAC clause put into your lease requiring the landlord to be responsible for HVAC maintenance and repairs. If the landlord doesn’t go for this option, perhaps you can negotiate a cap amount for you. If the repairs exceed that cap amount, then the landlord would need to take over the cost.
Often commercial spaces require some changes to prep them for your business. There are two ways to handle the time the property is being prepped.
You can ask for a period of time, rent-free, to prepare the space. Then you become responsible for the renovations. Your landlord may be unwilling to provide rent-free time.
The landlord might also agree to make the needed renovations to prep the space for you as long as you’re paying rent during that time period.
No matter the scenario, consider negotiating the time period you are preparing a space before you actively start using it for your business.
In some cases, there won’t be any perks to offer or get. But it never hurts to ask. In large commercial spaces, often, some perks can be arranged.
You might be able to negotiate something that might not cost you money and then saves you in the long run. For example, what if a large-scale commercial property could offer free wi-fi or free parking that you as a business wouldn’t have to pay for.
Consider the What the Landlord Brings to the Table
You definitely want to do your homework about landlords. Research their background and see if there is any information online about their dealings with other tenants.
Make sure they are financially sound and are acting in good faith. Don’t be afraid to ask for references like they might ask you for them. You want to know how they will act as your landlord.
Actual Negotiating Your Lease
This long list of considerations and issues can all become a part of your lease negotiation. You can start by asking for a lease offer. Look it over and consider the specifics.
Then, if you have done your own homework, you know what you need and want from the lease. You can have your real estate attorney begin the negotiation process and even put together a counter-proposal letter.
Commercial lease agreements are far from one size fits all. A good landlord will understand the need to negotiate an agreement that is viable for all parties involved.
Be prepared that this process often takes a long period of time if done right. Don’t think you can simply select a location, and then boom, you move in. Often these kinds of leases take months and months to work out.
Protect Your Business and Space
Once you have decided on the space and arranged the lease agreement, you want to make sure your part of the space is protected with both property and liability insurance to protect your business. Take a close look at your business insurance needs.
Once you have employees working in your new space, you also need to have workers comp insurance to protect yourself and the employee in the event of an injury or work-related accident.
Get the Best Commercial Lease for Your Business
Finding a great commercial space can really make all the difference for your business and its success. But almost as important once you find the space is to make sure the commercial lease you sign is carefully considered and negotiated, so your interests are protected.
Once you find your perfect location and get the lease arranged, let us help you make sure you have the insurance you need to protect your business and your property. Contact us today to discuss your business insurance needs.