Most businesses prefer to lease a property instead of buying one. Not only does it require less capital, but it also means more fluidity, and access to localities which would otherwise be unavailable.
If you’re considering leasing a commercial property, there are several questions you should ask yourself before signing on the dotted line.
1. Set a cap on costs.
While you may be happy with the amount agreed upon in your lease, keep in mind that most leases include a percentage increase clause, which means the base price of the lease will increase annually.
Consider whether or not your business will be able to afford the price increase, even if profits are less than optimal. Also, many owners require tenants to pay additional costs if they use excess amounts of electricity or otherwise make excessive use of common spaces.
2. What space is included in the lease?
Clarify exactly what spaces are included in the lease. Are common areas such as lobbies, bathrooms, elevators, and parking spaces included? You should also ask how the space is measured.
The square footage defined in the lease is a critical part of the deal, not only because commercial spaces are leased per square foot (the base rent), but also because it determines how much the common area maintenance fees will be. Also known as CAM fees, these are determined by dividing the square footage of the tenant by the total square footage of the building.
There is no standard way of measuring commercial spaces, and as a result various types of measurement have evolved. One type measures only usable square footage, which means only the actual space inside the walls that enclose the leased area.
Another type, called gross square footage, includes the width of the exterior walls as well as elevator shafts, stairways, basement areas, hallways, mezzanines, inner and outer balconies, garages, and vertical duct shafts. It does not include parking lots, lobbies or other areas higher than one floor, playing fields, or any other open areas.
The third most common form of measurement is termed rentable square footage (RSF). The landlord splits up the cost of the common areas between tenants, who each pay a pro-rated share of the square footage in addition to the base rent.
3. What are you responsible for repairing or maintaining?
Although triple net leases require tenants to pay for all expenses, including repair, maintenance, insurance and taxes, other types of commercial properties will usually divvy up expenses differently. Some leases split the expenses between the tenant and landlord, aside from major repairs such as roof or HVAC systems.
You should also check who is responsible for expenses related to the building, and equipment within.
4. Decide whether or not you a long term lease or short-term lease with option to renew is best for your business.
A long-term lease might seem like the best way to lock in a good price, however it also means you’ll be less able to respond to changes in the market or the economy. While it might seem as if you’ll end up paying more, a short-term lease with an option to renew gives you the flexibility to relocate in case the economy, location, or property itself prove not to be well-suited for you business.
5.Are you permitted to make changes to the property?
While most landlords expect tenants to make changes to the space, you should still make sure the lease specifies what changes may be made, and whether or not you’ll need to return the property to its original condition at the completion of the lease.
6.Can you transfer lease rights to another person?
If for some reason you decide to sell the business, will you be able to transfer the lease to the new owners? Can you sublet any or all portions of the space you rent?
7.Read the fine print.
How will the lease be terminated – will you be given notice first, and if so, how much is the landlord required to give you? What are the penalties if you or the landlord decide to end the lease early?
If you’re renting space in a shopping center, what additional rules will you be required to follow? Will you need to pay a portion of the advertising expenses for the mall? Are there any restrictions placed on the type of business you operate? What will happen to your business if the center decides to expand or renovate?
These are just some of the questions you should ask yourself when examining a potential lease. Of course the best way to ensure you get your money’s worth is to hire a lawyer experienced in commercial real estate.Tags: commercial leases, commercial properties, insurance, lease, taxes