Tips Before Signing A Commercial Lease
Many business owners put the cart before the horse and rent a space before doing the work to find out what they can afford. They do this because they think they are going to be in business and don’t want to pass up on ‘such a deal’.
Don’t make such a major decision without taking the time to prove your concept before you commit to anything.
And don’t sign “An offer to Lease” either thinking that it is not binding because it is!
To figure out what you need go back to your financial forecast and look at your revenue and bottom line. What rent does it say you can afford. $1500? $1750? If that’s what it says you can afford then that is exactly what you can afford and do not waiver.
You have to determine early on in the process if location is a real factor in your business’ success. If you are a restaurant it may be or if you are a landscaping company, then maybe not. If you are an event planning business maybe you can work from the comfort of your home.
However, if you feel the location is vital to your business success then it is important that you spend time finding what you feel is the best spot for you and your business.
You have to look at things like:
- Delivery Access
There are numerous other factors that come into play and they include whether the city is planning to rip up the street for the next two years and whether your business neighbor appeals to a less than favorable clientele.
You have to do your research.
If you find a spot that you think fits the bill, then do not run and sign a lease right away. Have a meeting with the landlord so you can let him know that you are not ‘married’ to his space but would like to negotiate a rate in the event that you choose to proceed with a formal agreement.
You should do your homework in advance of your meeting to find out EVERYTHING you can about the landlord.
- Is he in trouble?
- Is he leveraged to the hilt with the bank?
- Is he a good guy or a jerk?
You should also ask for all utility bills so you know what you can expect to be paying going forward.
On the topic of leverage, you have to understand that banks lend money on rental properties based on the quality of the leases held by the landlord. In other words, the landlord needs to have good leases at good rates. Knowing that you can expect to have to pay the going rate on a lease but the landlord can then offer you incentives like helping with capital improvements or delaying your first payment for a few months.
The capital improvement offer is what he will hold until the last moment. He could maybe replace the ceiling tiles or add a second bathroom or replace front windows in exchange for you signing a good lease.
Watch the length of term and the CAM – Common Area Maintenance. Rather than signing a 5‑year lease, sign a lease for 3 years with two, 3‑year options.
This is where you’ll get caught if you don’t ask the right question. As a lessee, you have to pay for all common area maintenance ‑ landscaping, roof repair et AL. Usually, this is a pre‑determined square footage charge added to your rent.
Sometimes $12 a sq. ft. can climb to $20 a sq. ft. in a hurry. Watch it!
Until you sign the lease, you are in control. Relinquish that power begrudgingly and only when you know you are ready to do so.
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