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If you're starting your own business and looking for commercial space, you might think a commercial lease is a simple as signing a lease for a home or an apartment. In fact, it's quite the opposite; commercial leases are far different and more complex. If you don't have much experience with commercial leases for your business, you risk making costly mistakes if you don't do your homework. We want you to succeed, so we have compiled 10 ways to avoid common commercial leasing mistakes.
If you are looking for commercial space for your business, you are probably anxious and excited to get started and find the right property. Yet, you don't want to move too fast. Save time in your search by stopping to evaluate your needs, especially in terms of space and how it relates to your company's growth. Consider having an architect help you plan your space, so you ensure your ideal commercial space fits into your budget. This can help narrow your search and stop you from making highly emotional decisions about the spaces you wish to lease.
Once you find the commercial property you are interested in leasing, you need time to perform due diligence and negotiate your lease, which can take months. If you need to renovate, do a build out, or take on any other construction projects before you are open for business, you might need more than a year before you can open. Give yourself plenty of time., at least six months, for all the necessary tasks which accompany leasing a commercial space, so you don't feel rushed to choose a property that isn't quite right for you. Even worse, you might feel the need to settle for less than favorable terms in your lease if you feel rushed.
Sometimes potential tenants find the "perfect" property. The space is in an ideal location, it's the right size, and it has many other attractive features. Yet, sometimes the tenant and landlord cannot come together and get the deal done. Maybe the landlord seems shady, maybe he or she is inflexible about one or more conditions which are important to you, or maybe the city has been talking about rezoning the area. One property will not make or break your business. Be flexible, but stay true to your deal-breakers and don't be afraid to walk away from the table. Other properties are out there and you can find one perfect FOR YOU.
When business owners are excited about leasing a new space and growing or beginning their business, they sometimes cut corners and don't perform due diligence on their new property. Failure to do the proper research prior to signing a lease can be a costly decision. You need to take the time to get inspections done so you can ensure electrical wiring and plumbing are in good order, as well as the HVAC system. If you find issues prior to signing the lease, it gives you leverage for negotiations. It also gives you the opportunity to have the landlord pay to fix any issues, so you don't have to incur costs once you sign a lease.
You likely know you can negotiate your rental rate, but landlord concessions are also negotiable. Sometimes a landlord might offer a rental discount or free rent for the first month(s) to attract tenants, but you can ask for more or different concessions depending on what's applicable to the property. Many of your requests will likely fall under a tenant improvement allowance. Make a list of the things you need to renovate or retrofit for your commercial space and try to get your landlord to include them in your lease agreement.
When a landlord includes a standard lease renewal clause in a commercial lease, the terms will favor him or her before the tenant. Typically, lease renewal rates are based on "fair market rent" which is somewhat subjective. To avoid an unexpected increase upon renewal, you need to carefully review, discuss, and outline agreeable lease renewal terms when you sign your initial lease.
If you've done any amount of pre-planning, you should have a good idea about your rent budget. Yet, as you search for properties, you might find a great property, but it is slightly out of your price range. Don't lose a good property over a minimal amount, especially when you can negotiate other parts of your lease or perhaps negotiate some landlord concessions to make up the difference.
Those who own commercial space like multi-year leases to ensure their property is filled. Although a multi-year lease might be agreeable to you, it also might not be the best business move if you intend to grow your business. Some business owners rent a larger space, one they can grow into. Yet, this leaves them with wasted space, and money, for one or more years. If you've done your homework and know your needs, you should ensure the space you need aligns with your company's growth objectives.
Most commercial leases include a base rental rate plus a portion of monthly operating expenses, which also include common area maintenance (CAM). CAM charges include things all tenants benefit from such as janitorial services, security costs, and garbage removal. Yet, some landlords might try to pass off additional charges and fees. Make sure you know exactly what items make up your additional costs each month before signing your lease.
Many common pitfalls associated with commercial leasing can be avoided by hiring a tenant rep who can walk you through the leasing process. Tenant reps have intimate market knowledge and sometimes know of open properties before they are even listed. Additionally, a tenant rep is familiar with all aspects of commercial leases, so he or she can review your lease and help you negotiate the best possible terms for your new commercial space. This includes knowing what to ask for upfront, at the LOI stage, prior to the lease being drawn up.
Commercial leasing mistakes are very common since business owners typically only negotiate a commercial lease every 5 to 10 years, and when a lease is signed, it is typically filed away in a drawer and never reviewed again.