Areas to Look at Closely at in a Commercial Lease
When shopping for commercial space, compare at least three to five commercial lease options before deciding which one fits your needs best both from a financial and a business standpoint. As you shop for office space, you need to understand key lease terms and to be aware of at least 16 things--16 gotchas--that could potentially hurt you when you lease commercial space. This list is by no means all inclusive. You need to talk to your lawyer and professional real estate broker about the ins and outs of commercial leases. This list is based on actual problems that various entrepreneurs have had that we have interviewed over the years.
Rentable square footage versus usable square footage--Rentable square feet versus usable square footage can vary in office lease, flex space and manufacturing space you wish to lease. If you are looking to rent 2,500 square feet of space, is that what you are getting? A group called the Building Owners and Managers Association offers a formula to determine the "load factor" of space so that you can easily compare usable square footage from one space you are looking at to another space. It could be a key point of negotiation with the landlord.
Permitted uses--Consider the uses permitted at the space you are evaluating. Is there any activity that you are planning in the business that could preclude you using the space you are looking at? If your business shifts in another direction after you launch it, and this often happens, could you be hampered from doing an activity in that space?
Lease commencement--This can be a killer for a new business. You sign on the dotted line for space and you are ready to go, only the space is not ready on the day you contracted for or a month later or a month after that. The landlord’s contractors are behind on the work! What remedy is in the lease for you? How will you be made whole? What protection do you have regarding occupying the space on the day you are supposed to?
Lease termination--What is in the commercial lease about early termination and can the landlord terminate the lease without cause? How difficult would it be for you to get out of your lease early, if you find that necessary?
Rent increases--Many a small business person has been absolutely stunned by rent increases that have come through on their space in various ways. You really need a professional to look at your commercial lease. Whatever he or she is charging to do it, it will save you money in the long run. This is a good time to negotiate on lease terms. If the landlord refuses to budge on various clauses, you can always ask for a cap on increases or you can go to one of his competitors and negotiate a better deal. What about late charges if you are late on the rent? What is the grace period? With more and more clients and customers extending the time they take to pay their bills, you need to at least anticipate cash flow issues from time to time.
Common area charges--What does the commercial lease say about common area maintenance and other building operation costs and is there a cap on charges? Check this one out carefully!
Real estate taxes--Another growing problem as states and municipalities scramble for more revenue is tax increases on commercial real estate. As we all know, everyone in business is "rich" and all landlords have "deep pockets," so look closely as to how the lease deals with tax increases? If a share is passed on to you, can you afford to pay in the worst case scenario? What is the "worst case scenario" in your area? How much have taxes risen in your area in the past? What does the lease say about vacant space in the building?
Sale of the building--What does the lease say about the sale of the building? Look closely at this one because that building could well be sold and change ownershhip. Typically, in sales of residential and commercial real estate, when a property is sold the tax authorities will come in a revalue it higher and increase taxes on it. What part will you share in this? What if the building, for tax purposes is valued at $2 million. Then someone comes along and actually buys it for $4 million?
Increased expenses--Sometimes there are lease clauses that allow landlords to push through increases in rent due to increases in expenses. Sometimes, when you try to pin down exactly what those increases are, it is difficult. Therefore, check your lease before signing it to see what your rights are to inspect the landlord’s books. In business, as in international politics, "trust but verify." How will you be able to verify the validity of the expenses?
Weekend use of premises--Law firms nail this down in the office lease because so many of their people have to work late nights and weekends. Some business owners sometimes overlook the possibility of having to open their offices on weekends or stay late. Check the lease for details and procedures on this. But the bottom line is how much is it going to cost you or can you simply enter the building and go into your space if you have the key and security code?
Business interruption--What if you cannot use the space for any reason? We all worry about terrorism but what is more likely is a flood, fire or a massive water main break or gas explosion because of our aging infrastructure. What happens if your business is interrupted and you cannot function in your office space? What is the landlord responsible for? What does the office lease say?
Building destruction--And speaking of business interruptions, what happens if there is a huge gas leak in the basement over a weekend and the entire building blows up? Does the landlord have to rebuild the structure? What is your obligation to the space? Does the insurance company let you share in any proceeds of the destruction? What does the lease say about this?
Mortgage foreclosure--This seems to be affecting residential apartment dwellers more than anyone else but what happens to you, the tenant, in the case of the landlord defaulting on his or her mortgage?
TI or tenant improvements--Unless you plan to take the space as is, tenant improvements or TI can be extremely costly. This can hurt you if you are not careful. In today’s market, many landlord’s are paying for TI as part of the lease negotiation. In some cases, tenants can get a few free months of rent plus landlord-paid-for TIs. If you will have to pay for your own TIs, make sure you are at least able to use your own contractors. Using the landlord-hired, tenant-billed contractor is a recipe for high bills.
Heating and cooling costs--What does your lease say about increases in energy costs and how will you be charged? Is the building and your space individually metered (ideal) or is the cost split up among all of the tenants. How is your portion determined and how can you verify that your share is correct?
Building repairs--During the course of your commercial lease term, something will happen in your space or in the common areas of the building that will require repairs. How is this paid for? What control do you have on costs?
The commercial lease is not for the newbie and if you are a newbie, make sure you have appropriate professionals representing your interests or you could get hurt.