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After months of searching, you've finally found the perfectlocation for your business. You're eager to sign on the dottedline. Not so fast! Before you commit to a location, make sure younegotiate a lease you can live with.
Rent is the largest expense for most businesses in commerciallocations, so it's important to get what you want from a lease,cautions Jack O'Donohue, executive vice president of commercialreal estate firm Stratford Associates in Fairfax, Virginia. Whilerents have gone up in many parts of the country, it's stillpossible to strike a bargain if you know how to negotiate.
To get a good deal, you or your real estate broker should alwaystry to modify the terms of a lease, says B. Alan Whitson, anational real estate consultant in Newport Beach, California."The standard lease is always written in the landlord'sfavor," he explains. "[It's up to you] to negotiatebetter terms.'
How to get the best price? Pay close attention to seven areas ofthe rental agreement:
1. The overall lease. "A lot of small-businessowners don't read the lease and don't understandit,' Whitson says. But it's your responsibility tounderstand what you're getting into. "The lease documentis the rule book," Whitson says. "Whatever is in there,you're stuck with.'
Like any contract, the lease should be reviewed by an attorney,says Fred Steingold, author of The Legal Guide for Starting& Running a Small Business (Nolo Press). "Mostattorneys can review a lease in less than an hour,' hesays, "so it's not a big expense, and it's a safetyvalve for potential problems.'
2. Square-foot price vs. the bottom line. Manyleases state a base rent per square foot. "This rate can bemisleading,' Steingold says. "Sometimes it includesspace that's not useable, such as corridors and elevators. Thatmakes it difficult to compare two leases.'
Look, instead, at the total amount to be paid. "Sometimes aspace that's slightly smaller with a higher [price per] squarefoot may work out better for your business because it's moreefficiently laid out,' Steingold says.
3. Length of the lease. Many new business ownerswant a short lease or no lease at all. That way, if the business isunsuccessful, they aren't on the hook for thousands of dollarsfor space they no longer use.
It may be difficult to get a short lease if you're in atight housing market. When space is scarce, many landlordswon't settle for leases shorter than five years, saysO'Donohue.
4. Tenant improvements. Carol Hackman's landlordwas willing to remodel an unfinished space when she signed afive-year lease for her Web-site design and development firm, TheLaser's Edge Inc., in a Wilmington, Delaware, business park."I had been there two years and wanted to upgrade into adifferent space,' she says. "I looked at [existing]spaces in this center and none was right for me. The owner moved uswithout hesitation.'
You may want to save money by making improvements yourself, butmost leases require the landlord's permission. "Submityour plans before you sign the lease," Steingold says.
5. What's included and what's not? Too manysmall-business owners focus on dollar amounts without consideringwhat they get for their money. Some tenants pay for utilities and apercentage of common area maintenance. Steingold's law firm hasa gross lease, which includes all expenses, but some tenants sign atriple net lease in which they pay their own property taxes,insurance and maintenance. In such cases, the base rent isless.
Also watch for nonmonetary clauses. Will heating and airconditioning be shut off after business hours or on weekends? Thismay be important if you plan to work odd hours.
6. Subleases and allowable uses. If you decide tomove or find that you're using just part of your space, you maywant to sublease or assign the lease to another business. But mostleases won't allow this without the landlord'sapproval.
Most leases also specify the type of work you can do on thepremises. Landlords tend to make this "allowable use" asnarrow as possible. In most cases, you should make it broader,Steingold says, to allow for future expansion of your business.
7. Pass-through expenses. "A common trap fortenants is the annual increase in operating costs, or`pass-throughs,' " says O'Donohue."They'll ask for a 4-percent or 5-percent [annualincrease] to protect the landlord against inflation.'
These days, the increase often is more than the inflation ratebecause the soft real estate market of the early '90s forcedlandlords to forgo any rent increases for a long time. Watch forinaccurate calculations of operating costs, Whitson warns:"Overcharging tenants 10 percent to 15 percent is notuncommon.'
Leasing a commercial space poses some risks, but by payingattention to these seven points, you can protect yourself and getyour business off on the right foot.
Jan Norman is a freelance writer who specializes insmall-business issues.
Learn The Lingo
Lease terms you should know:
- Lessor: landlord
- Lessee: tenant
- Right of first refusal: before vacant space is rented tosomeone else, landlord must offer it to the current tenant with thesame terms that will be offered to the public
- Gross lease: tenant pays flat monthly amount; landlordpays all operating costs, including property taxes, insurance andutilities
- Triple net lease: tenant pays base rent, taxes,insurance, repairs and maintenance
- Percentage lease: base rent, operating expenses, commonarea maintenance, plus a percentage of tenant's gross income(most common for retailers in shopping malls)
- Sublet: tenant rents all or part of space to anotherbusiness; tenant is still responsible for paying all costs tolandlord
- Assign lease: tenant turns lease over to anotherbusiness, which assumes payments and obligations under thelease
- Anchor tenant: major store or supermarket that attractscustomers to a shopping center
- Exclusivity provision: shopping center can't leaseto another tenant who provides the same product or service thatexisting tenant does
- CAM: common area maintenance charges, including propertytaxes, security, parking lot lighting and maintenance; may notapply to anchor tenants in retail leases
- Nondisturbance clause: tenant cannot be forced to moveor sign a new lease if building or shopping center is sold orundergoes foreclosure
Get The Answers
Here are some questions to ask before signing a lease:
1. Does the lease specifically state the square footage ofthe premises? The total rentable square footage of thebuilding?
2. Is the tenant's share of expenses based on the totalsquare footage of the building or the square footage leased by thelandlord? Your share may be lower if it's based on the totalsquare footage.
3. Do the base year expenses reflect full occupancy or arethey adjusted to full occupancy (i.e., base year real estate taxeson an unfinished building are lower than in subsequent years)?
4. Must the landlord provide a detailed list of expenses,prepared by a CPA, to support increases?
5. Does the lease clearly give the tenant the right toaudit the landlord's books and records?
6. If use of the building is interrupted, does the leasedefine the remedies available to the tenant, such as rent abatementor lease cancellation?
7. If the landlord does not meet repair responsibilities,can the tenant make the repairs, after notice to the landlord, anddeduct the cost from the rent?
8. Is the landlord required to obtain nondisturbance agreementsfrom current and future lenders?
9. Does the lease clearly define how disputes will bedecided?
Source: 327 Questions to Ask Before You Sign a Lease,by B. Alan Whitson (B. Alan Whitson Co., 800-452-4480).
