Signing a Commercial Lease
Negotiating a Lease for your Business
Written by Chris Martin for Gaebler Ventures
Before entrepreneurs can move into office space, they have to first negotiate a lease. And that process can be confusing, time-consuming, and frustrating. They also run the risk of entering into a problematic agreement which can retard the growth of a business or even sink it altogether. So negotiating a favorable lease agreement is vital to a company's growth and long-term stability. Here are the steps you must take in order to navigate this process smoothly.
Many (if not most) entrepreneurs begin working on the initial phases of their enterprises out of their own homes.
But once these businesses start to blossom, they threaten to outgrow their space. This is when entrepreneurs begin the search for office space so they can spread out, hire employees, and build a storefront or base of operations to attract customers.
But before they can move into their office space, they have to first negotiate a lease. And that process can be confusing, time-consuming, and frustrating. They also run the risk of entering into a problematic agreement which can retard the growth of a business or even sink it altogether.
So negotiating a favorable lease agreement is vital to a company's growth and long-term stability. Here are the steps you must take in order to navigate this process smoothly.
Location, location, location! Some businesses grow so quickly (or their owners become so anxious) that entrepreneurs are tempted to grab the first available property they can find which meets their needs. That's a perfect recipe for getting chained to a toxic lease.
Do some research on prices and locations in the area. Examine the amenities (parking, freeway access, maintenance arrangements, etc.) that would come with the property. If you're a retailer, find properties which already have companies that complement your business (or will not detract from it). You can find this information at websites maintained by organizations like the International Council of Shopping Centers or by simply driving around your target area.
Secure a broker. Finding the right commercial real estate broker can be a bit complicated. So like finding a location, this task should not be taken lightly.
Consider getting referrals from current business owners - especially ones who may be operating at a location you are considering. Be sure to ask potential brokers if they understand your business and how many similar leasing arrangements they have worked on. And avoid brokers who represent either a competitor or a landlord of a property you are looking at. The last thing you need is a broker who has ties to interests which directly conflict with your own.
Figure out a budget. Leases in commercial real estate are negotiated by the year, so figure out what your monthly rent will be by dividing the listed price by 12. A good rule of thumb is to set your lease payment at less than 10% of anticipated gross revenues. Ask you broker what similar tenants are shelling out for their leases.
Get an attorney. Commercial lease agreements can be hundreds of pages long and contain loads of legalese and unfamiliar terms. So once you are ready to discuss lease terms, be sure to have an experienced attorney on your side. It's probably not a job for your personal attorney unless he or she has substantial commercial real estate experience.
When searching for your attorney, try and get references like you did when you looked for a broker. And don't be afraid to ask potential attorneys what their fees will be and what services you will receive. Give your attorney the proper amount of time to review the entire lease agreement and submit his or her input.
Make the proposal. Your broker will send a letter of intent to your landlord outlining the basics of what you want your lease agreement to be. This is a nonbinding document, and all of its components are negotiable. Pay special attention to the lease term and start date, clauses which tie your sales to an increased rental rate, maintenance and tenant improvement rules and fees, regulations relating to current or future tenants, and personal guarantee requirements.
Taking the time to build the ideal lease will ease your mind and free up your bank account for core business expenses. So just like you wouldn't hastily move your family into a money pit, don't hurry the process of securing a lease agreement and risk being trapped in a financially-draining raw deal.
Chris Martin has been a professional writer for the last seven years. He is interested in franchises and equity acquisition.
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