Hi folks, Dave Waring here again from fitsmallbusiness.com and today's lesson of the day.
In our last video we continued our series on how to start a successful business, with
a look at how to get a great business card on any budget.
In today's video we are going to continue that series with a look at how to go about
leasing space for your new business.
Should You Work With A Broker?
The commercial real estate market is much less standardized than the residential real
estate market.
In fact, just being able to find what spaces are currently available is difficult in the
commercial market.
There are also many nuances involved in renting commercial property, like zoning restrictions,
that an experienced broker can help you navigate.
When you also consider the fact that the landlord is normally the one that pays the broker's
commission, there is really no reason not to work with a broker when leasing commercial
real estate.
When choosing a commercial real estate broker, you want to work with a tenant broker.
In contrast to leasing agents who represent the landlord, tenant brokers specialize in
showing property to potential lessees.
Generally tenant brokers will want you to sign a representation agreement, giving them
the exclusive right to show you property.
If you are renting a smaller space then you will likely want to sign the representation
agreement, as this will further incentivize the broker to put time into finding you the
right space.
If you are leasing a large space, where the commission will be very sizable for the broker,
then you may want to keep your options open.
If you happen to be in a very small town where there are no commercial real estate brokers,
then there is another way.
In this case use the public tax records to find out who owns the building and contact
them directly.
I have included a link with instructions on how to go about that in the resources link
below this video.
Here are some Other Things To Keep In Mind When Working With a Commercial Real Estate
Broker
Commercial real estate brokers are paid a percentage of the lease amount, so they have
an incentive to lease you the most expensive space possible.
They have no incentive to point things out in your lease which you should negotiate or
which may be problematic.
Generally, the less the total cost of the lease the less attention you can expect from
the broker.
With this in mind, you may also want to consider working with a real estate attorney who can
help you navigate the lease and point out potential issues.
Where do you find a commercial real estate broker?
If you are working with a real estate attorney to help you negotiate your lease then he or
she should know many brokers that can assist you.
If not, then asking for a referral from people you know who have rented commercial space
and were happy with the results is the next best place to start.
I have also included a list of some of the largest commercial real estate firms in the
resources link below this video.
Next lets talk about how to Navigate the commercial real estate lease.
In most cases, the first copy of a lease you receive will be completely skewed in favor
of the landlord.
They do this in the hopes that, like many of their other tenants, you will just sign
the lease without really understanding it.
However, it is important to know that commercial leases are not standardized, and many of the
clauses in the lease can be negotiated so that they are fair to both the landlord and
the tenant.
In most cases you are going to have to sign a personal guarantee when renting commercial
real estate.
This means that if the business is not able to pay the rent then you are personally liable.
This also means that your landlord will likely want to run a check on your personal finances,
to make sure you have the capability to back up the lease.
One thing to note here is that most landlords are simply asking you to establish a track
record, so having the personal guarantee expire after a set period of time (say after 2 or
3 years on a 5 year lease) should be easy to negotiate in many cases.
In most markets commercial real estate is quoted either by the year or month, and on
a per square foot basis.
Keep in mind however that the space which you actually use for your office, called usable
sq. footage, and the square footage that you are charged for are often different.
The reason why is that you are charged based on your usable square footage and your share
of the common space which is in the building.
For this reason, it is important to measure your space.
I have included a link in the resources link below this video with more detail on this
point.
Here is an overview of the different types of Leases:
The Percentage Lease:
The percentage lease is common with retail spaces.
You pay a base rent plus a percentage of sales.
I have included an article on how this is calculated in the resources link below this
video.
The Net Lease:
In addition to the price per sq. foot, with a net lease you also pay for some or all of
the other expenses associated with running the property.
In a double net lease this would include taxes and insurance.
In a triple net lease this would include taxes, insurance, and maintenance.
These are sometimes also referred to as Common Area Maintenance or CAM fees.
This is one of the most common areas where tenants run into trouble.
With this in mind you should have a full understanding of all CAM fees, and negotiate for caps on
how much they can be increased each year, before signing your lease.
I have included an article on how to avoid CAM fee surprises in the resources link below
this video.
The Gross Lease:
With gross leases all fees are accounted for in the per sq. footage price quote.
Here is an overview of the things you should negotiate with your commercial lease:
The Length of the lease
The best case scenario for you as the tenant is a short term lease with multiple options
to renew after the lease is up.
This way if you go out of business or outgrow your space, you are not stuck with the lease.
You also avoid losing the space if it continues to serve your needs well.
However, generally longer lease terms are more favorable to the landlord, so the longer
the lease the better the negotiating position you are in for other parts of the contract.
With this in mind, commercial leases are generally longer than residential leases, and leases
with terms of 5 or even 10 years are not uncommon in the commercial real estate space.
How are rent increases handled?
Landlords will generally try and work into the lease an annual increase in rent based
on the consumer price index or some other measure.
These are also called escalations and should be fully understood before entering into any
lease.
I have included an article in the resources link below this video with more on escalations.
Find out who is responsible for what expenses
With most residential leases the landlord is responsible for the maintenance of the
property and fixing things like AC units and other appliances.
This is not always the case with commercial property, so make sure the lease clarifies
who is responsible for what expenses.
Building Out the Space
If you need to make alterations to the space then you want to make sure it is clearly outlined
in the lease what alterations you are allowed to make and who is responsible for paying
for them.
With longer term leases it is not uncommon for the landlord to cover the costs of building
out the space.
Also keep in mind that if you are not going to be able to use the space until it is built
out you don't want to be paying full rent during that time.
Signage
If your business needs a sign for customers then make sure that you understand what is
and isn't allowed.
Sublease Clause
Whenever possible you want to have the ability to sublease your space.
This offers some protection if you are no longer able to pay the rent, or if you have
expanded to the point where you need to move into larger space.
Exit Plan Clause
What happens if you have to break the lease before its over?
Whenever possible you want to negotiate favorable early termination fees, like a 2 or 3 month
penalty.
Assignability
If you sell your business then you are going to need to assign the lease to the new owner.
Some leases do not allow this.
A Co-Tenancy Clause
If your business depends on the foot traffic that another nearby business brings into an
area, then you should consider adding a co-tenancy clause which allows you to break your lease
if the anchor tenant leaves.
This is especially important for things like small shopping malls, which have one or two
very large stores that are responsible for a large portion of the mall's customers.
An Exclusive Use Clause
If your business depends on foot traffic then you may want to try and negotiate an exclusive
use clause into the contract, which prevents the landlord from renting space out to one
of your competitors.
The Security Deposit
There are no limits or standards as to how much a commercial landlord can require for
a security deposit.
I have included an article with some great tips on how to negotiate your security deposit
in the resources link below this video.
The start date of the lease.
You want to make sure that you are up and running and able to meet all the obligations
of the lease before the start date.
This means that the start date may need to be different than the date you sign the lease.
If you are negotiating a long term lease for a retail store or other type of business where
the holidays make up the most of your sales, then you want to make sure that you fit as
many holiday periods into your lease as possible.
That's our video for today, if you have any comments or questions please leave them in
the comments section below.
Also be sure to stay tuned for the next video in our how to start a successful business
series, where we discuss how to find the perfect location for your business.
For more great advice on how to become a successful entrepreneur be sure to visit us at fitsmallbusiness.com
today.
Thanks for watching!