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Commercial Leases

Renting a location can be tricky. Here's how to get the best deal.

If you've never been involved in renting commercial space, your first glimpse of a commercial lease may be overwhelming. They are lengthy, full of jargon and unfamiliar terms, and always written to the landlord's advantage. But they are negotiable. Whether you're working on the deal yourself or using an agent, the key to successful lease negotiations is knowing what you want, understanding what the lease document says, and being reasonable in your demands.

Especially for retail space, be sure your lease includes a bail-out clause, which lets you out of the lease if your sales don't reach an agreed-on amount, and a co-tenancy clause so you can break the lease if an anchor store closes or moves. If you're going to have to do a substantial amount of work to get the space ready for occupancy, consider negotiating a construction allowance-generally $5 to $25 per square foot-to help offset the costs.

Be sure you clearly understand the difference between rentable and what is usable space. Rentable space is what you pay for; usable is what you can actually use to run your business and typically doesn't include hallways, restrooms, lobbies, elevator shafts, stairwells and so forth. You may be expected to pay a pro-rated portion of common area maintenance costs.

This is not unusual, but be sure the fees are reasonable and that the landlord isn't making a profit on these charges. Also, check for clauses that allow the landlord the right to remodel at the tenants' expense without prior approval and insist on language that limits your financial liability.

Leasehold Improvements
Leasehold improvements are the nonremovable installations-either original or the results of remodeling-that you make to the facility to accommodate your business needs. Such improvements are typically more substantial when renting new space, which may consist of only concrete walls and flooring. Often existing space will include at least some fixtures you can use. Get estimates on the improvements you'll need to make before signing the lease, so you'll know what your total move-in costs will be and so you can make a fair construction allowance request.

Negotiating The Lease
The first lease the landlord presents is usually just the starting point. You may be surprised at what you can get in the way of concessions and extras simply by asking. Of course, you need to be reasonable and keep your demands in line with acceptable business practices and current market conditions. A good commercial real estate agent can be invaluable in this area. Avoid issuing ultimatums; they almost always close doors-and if you fail to follow through, your next "ultimatum" won't mean much. Consider beginning the process with something that's close to your "best and final offer." That way, your negotiations won't be lengthy and protracted, and you can either reach a mutually acceptable deal or move on to a different property. The longer negotiations take, the more potential there is for things to go wrong.

Essentially, everything in the lease is subject to negotiation, including financial terms, the starting rent, rent increases, tenant leasehold improvements, options for lease renewal, the tenant's rights and responsibilities, and other general terms and conditions. You or your agent can negotiate the lease, but then it should be drawn up by an attorney. Typically, the landlord or his attorney will draft the lease, and an attorney you hire who specializes in real estate should review it for you before you sign.

Excerpted from Start Your Own Business: The Only Start-Up Book You'll Ever Need, by Rieva Lesonsky and the Staff of Entrepreneur Magazine, © 1998 Entrepreneur Press

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