Commercial Lease Recommendations and Pitfalls to Avoid
Congratulations! Your business is expanding, and you are in the market for your first commercial lease.
Signing a commercial lease is one of the biggest steps in a business owner’s entrepreneurial journey and it is crucial to get it right. Negotiating and reviewing a lease can be intimidating and I strongly encourage you to consult with a real estate broker to obtain a better understanding of what is it you are signing. But before calling your broker you should read through these recommendations and the list of items below to avoid the most common pitfalls which could leave you having expensive regrets.
Don’t DIY: The DIY approach should not be applied to a commercial lease. You could miss nuances and important terms in the documents. Working with an experienced real estate broker and/or lawyer will help you avoid some easy-to-make mistakes and they can also help you negotiate better terms.
Get advisors and form an A-team for the success of the project – within your company, assign an acting project manager as a single point of contact for this project and gather data from other stakeholders (HR, finance, IT ect). Again, enlist a broker and get help from an OPM (Owners Project Manager) for planning as well as sourcing the necessary architects and engineers for your project.
Understand your needs: Consider your financial resources as well as the amount of space you will need, both initially and as you grow. Consider your long-term needs. What does your headcount projection look like at 5% or 15% growth? This knowledge will allow you to plan for the space you need. Lease term are long 3/5/7 + years and there are costs associated with breaking leases as well as other long-term financial implications.
Choose the right location: Do you really have to be in the heart of the Cambridge Business District? It will help to map your employees Zip codes and ascertain their reliance on things like access to public transportation and/or parking. You don’t necessarily have to be in Kendall square to be successful and get peer recognition as a biotech company. Lots of companies have decided to be go to the Seaport or the suburbs, thereby foregoing the expansive price tags of Kendall Square.
Understand the different types of commercial leases: it is helpful to understand the terminology and the options. There are multiple options for commercial lease agreements:
- Single net: In a single net lease, the tenant pays for rent and property taxes
- Double net: In a double net lease, the tenant pays for rent, insurance and property taxes.
- Triple net: In a triple net lease, the tenant pays for rent, insurance, property taxes and property maintenance costs.
- Full-service: Also known as a gross lease, a full-service lease occurs when the tenant is only responsible for rent and the landlord covers all other costs associated with the space. This is the most common type of commercial lease and the one that provides the most protections to tenants
- Percentage: In a percentage lease, the tenant pays a pre-determined amount of base rent each month and a percentage of their monthly sales from that property. Percentage leases are most commonly used in retail spaces
Major components to look for: Be sure to carefully read every section of the commercial lease
- Lease term/type: Be certain that you can live with both the terms (length of time) and type of your lease (as describe above).
- Rent amount: confirm annual and monthly amount per square foot. What is the escalation rate or rent increase after a certain period of time? This has a significant impact on your cash flow and should be clarified and negotiated.
- Security deposit: there aren’t any laws governing how much a commercial landlord can ask for a security deposit. Commercial landlords may set whatever deposit amount they want. You may be able to negotiate the dollar amount and more favorable terms if you are a desirable tenant with impeccable credit and business history.
- Permitted use: A commercial lease will typically contain a provision setting forth how the space can be used. It is typically drafted such that the space is limited to a particular permitted use and any other use of the space is prohibited
- Exclusive use: A lot of leases will be very restrictive and narrow in a tenant’s use of leased space
- Maintenance and renovations: Get a clear understanding of your maintenance obligations as a tenant along with what any renovations will cost you.
- Insurance: Usually required by the landlord so they don’t have to worry about factors beyond their controls
- Personal guarantee: A personal guaranty is the scariest part of any lease. If you are a small business, and you want the space, you will almost certainly be required to sign a guaranty. Typically, your entity (LLC, Corporation, etc.) is the tenant and you, as the owner, would be the guarantor.
- Subleasing: you will always need a landlord’s approval to assign your interest in the lease, or to sublease any portion of your space to another person or entity.
Other items to consider in your commercial lease: If you need access to a loading dock find out if there are restrictions or implications like delivery on site. Check for after-hours expenses for HVAC or other utilities not covered during regular hours. These can be costly and add up quickly.
Ensure the Lease matches the Letter of Intent (LOI) Check and check again that the lease and the LOI match. We often see lease agreements where the provisions do not match what was originally negotiated in the LOI you should make sure that things like square footage, rent (including CAM’s/operating expenses, percentage rent), rental abatement, lease term and renewal periods, tenant improvement allowance, tenant use, guarantor(s), security deposits and advanced rent, signage and real estate broker commission are all in agreement.
The list above should help you avoid major mistakes as you go about deciphering the Real Estate jargon. Hereva is happy to help with reviewing and providing real estate advice and they can also act as your OPM. Talk to us today and let us help you in your search.