5 COMMERCIAL LEASE MISTAKES TO AVOID
Negotiating a commercial lease for your new office space is nothing like signing a residential lease. There are multiple different lease type ranging from full service (all-inclusive) to NNN (where everything is a la carte) and everything in between. And commercial leases have many more conditions that you’ll need and want to negotiate.
As with everything in life, the devil is always in the details. Something that looks like a great deal may not turn out to be once you take all of the factors into consideration. Similarly, I’ve seen deals that seem less than stellar at first blush that turn out to be winners.
You can avoid disaster by understanding the fine print of your will lease agreement and addressing the terms for issues that arise during the tenant-landlord relationship that are often overlooked. Signing on to bad lease terms can have a long-term impact on your business.
Here are 5 common commercial lease mistakes you will want to avoid in order to set yourself up for success.
- Going into the Negotiation Alone
Do not go into a commercial lease negotiation alone. Hire a broker that represents you. As a matter of fact, you ideally want to use this broker from the very beginning to help you identify the best location and space in your desired market. A qualified broker will understand your business model, competition and your space needs. The tenant rep broker (along with a trusted real estate attorney) will help you avoid costly oversights in the lease agreement and negotiate terms in your favor. Trying to negotiate alone and avoid potential broker fees can lead to significantly greater costs in the long run.
- Signing a Standard Lease Agreement
Do not sign a standard lease agreement rather than negotiating the key points. Having both written leases as the landlord and negotiated them as the tenant, I will testify to you that all standard leases are written to benefit the landlord. Most of the terms in a commercial lease are negotiable including the term, the rent, the buildout allowance and more. You can anticipate that the negotiation process will require a fair amount of give and take. Anticipate this and give yourself enough time to go through the process. If you are in a rush to get the space, you will forfeit some of your bargaining power. Take the time to negotiate the terms of your lease, it will protect your business.
- Not Checking Rate Fluctuations
Does your lease say the landlord can reevaluate the space during your lease, and up certain rates such as electricity and water? Very rarely will a landlord offer you a lease that is a fixed rate. Even if you sign a full-service lease, there is usually a provision for escalating costs that are, in turn, passed on to you. What does that mean? You may discover that the originally reasonable rent has skyrocketed by the end of the year because of adjustments made to compensate for the increased costs. There are a several ways that the increased expenses can be passed on to you. Make sure the terms of any rate increases are clearly spelled out to avoid surprises.
- Missing a Pre-existing Condition Clause
A pre-existing condition clause requires you to return the space to its original layout – including removing flooring, demolishing new walls, repainting, etc. If you are renting medical space in a medical office building, it’s likely that both previous and future tenants will be healthcare providers. In this case, if you don’t require a significant buildout, a pre-existing condition clause may be a non-issue. But if you are doing extensive renovations to the space, returning the space back to its original state may be expensive. Remember that when you are looking at whether a particular commercial lease is a good deal you need to consider all of your costs.
- Forgetting Real Estate Taxes
What percentage of the building’s real estate tax are you responsible for? Property taxes are part of the expenses that are typically passed onto the tenant. Common area maintenance (CAM) charges are typically divided on a pro rata basis of the number of square feet your space occupies relative to the overall leasable space. CAM charges includes property taxes so you’ll want to understand how much of the common area you are responsible for and what happens when the rate goes up. Otherwise, you may discover that the property taxes and a tax hike add more to your lease than you anticipated.
As with any other business, landlords will try to squeeze the most possible profit from their properties. It’s your job to negotiate for your most advantageous lease terms before you sign. Have a clear game plan for addressing the details before starting the negotiation process. Your business will thank you!
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