One of the biggest expenses many businesses have to deal with is the cost of leasing space for their business. Getting familiar with what the lease covers and which sections are negotiable can save you money and frustration. Here are important factors to consider when considering your space needs.
Affordability
Since leasing costs are one of the largest items in your budget, spend time looking at different locations and then comparing the pros and cons of each.
Using a spreadsheet to compare variables is helpful. The items to account for are:
- Leased square footage
- Unit lease price
- Incremental expenses like maintenance
- Term of the lease
- Individual pluses and minuses of the each property
Now is the time to learn how to read a lease. Ask your accountant, insurance agent, lawyer, or broker for help. Commercial leases are not easy to understand. Some are even hundreds of pages long.
Factors that impact your total leasing costs, include:
- Monthly lease payment
- Maintenance fees and typical repair costs
- Upkeep for common areas
- Utilities
- Hidden fees
After you get a handle on how much these additional costs will add to your monthly lease payment, compare it to how much you can afford. The rule of thumb is to spend no more than 10% of your projected gross revenues. That means if the rent is $3,000 a month, you need to generate $30,000 a month in revenue to afford it comfortably.
Lease Terms and Negotiable Items
Much of what is in a lease agreement is negotiable. That is why it makes sense to hire a broker.
Find an experienced agent who understands the local market well. You want one who works for you, not for the property owner. Make sure that the same time they represent you, they do not also work for a competitor or someone who needs the same type of space as you.
Your agent can help you negotiate a deal that fits your budget. Here are the areas that are open to bargaining:
- The lease term. Though most run 5 to 20 years, you can negotiate for a longer or shorter period.
- Starting date of the lease. If you are making improvements, it might be better for your budget to delay the beginning of the lease until you move in, not when construction or remodeling begins.
- Percent rent clause, common with grocery stores and other retail businesses. You can negotiate a beginning rent at a lower percentage. You can also ask that the higher rate does not start until you reach your targeted revenues for 12 consecutive months.
- Kickout clause, which gives you the right to terminate the lease if you do not reach the revenue levels you expected.
- Co-tenancy agreement, which gives you leverage if a major tenant in a shopping mall leaves, reducing the number of people coming through. You can negotiate a rent reduction or the right to move too.
- Tenant improvements and move-in incentives. If the rental market is soft, the landlord might agree to fix up the building to meet your needs, absorbing the cost himself.
- Limits on shared area maintenance fees, including caps, fixed rates and not paying associated administrative fees.
- Radius clause, which some landlords will impose, requiring that you not open another business within a certain radius, like five miles. This is a problem if your shop gets busy and you want to expand. You can negotiate a time limit cap on this.
- Exclusivity clause, which means the landlord agrees not to rent to a competitor.
- Personal guarantee, which means you agree to pay the rent with your money if your business goes under. You can negotiate to limit this clause to your first few years in business.
Other Caveats
Surprises cost money when it comes to leases. It is not uncommon for a business owner to call the landlord when the roof leaks into the IT department and get the reply, “That is your responsibility. Didn’t you read the lease?”
Any legal document running to tens or hundreds of pages needs expert analysis. Find a reputable real estate attorney experienced in your property needs. Since leases typically run five to twenty years, you want to have a qualified professional make sure it benefits you. It is an investment in the future of your business, as well as your peace of mind.
Getting the best deal on a lease means finding a broker, researching the market, comparing properties, and having an experienced real estate lawyer check it before you sign it. Investing time now can save you a bundle in the years ahead.