New and growing businesses spend a large portion of their finances leasing commercial property. A brick-and-mortar office is part of the game for non-virtual companies, and it’s an expensive one. Commercial property leases must be negotiated to provide the best benefit for your company and workers. Here’s what you should know about leasing commercial property for a small business or startup.
According to research by Realtor.org, commercial property rent has risen across the nation, and is projected to continue to increase over 2016 by 2.5-3.7%.
Some businesses won’t be able to get into commercial property without a business loan, so be sure to do your research first and know the terms of each type of property agreement.
Defining the lease agreement
The first things you’ll negotiate are the term and rent on your commercial property lease. Keep your specific needs in mind, but know that 1-2 year lease terms (with the option to renew) are best for small businesses.
Why do you want short terms with the option to renew? The property may be great for your business, but property owners can hike rent prices mid-lease, leaving you looking for another place to go. This is why you’ll want to talk about the inevitable rent increases and develop a plan for managing them over the period of your lease. Expected increases are much more easily dealt with than unexpected increases.
Plus, so much can change for a business in a month, 6 months, or a year; it’s impossible to make concrete, long-term plans for still-growing businesses. You never know where your business will take you next, so don’t shackle yourself to one place!
- Schedule a consultation with a real estate lawyer to ensure you’re covering all your bases.
- Try working with a commercial real estate broker to help field negotiations with the property owner.
Figure out your expenses
Each month, you’ll have a lease payment… But wait–there’s more! You need to find out what expenses you’ll be paying beyond the lease payment. Sometimes, commercial property owners or landlords include ‘hidden fees’ in the lease agreement (we told you you should consult with a real estate lawyer, right?). Those might include maintenance fees, Common Area Maintenance (CAM) fees, and more.
- Don’t forget about the ongoing costs of utilities! They will more than likely be your responsibility to pay, so make sure you know exactly how the amount you owe is measured. Is your property individually metered or will you pay based on your square footage?
Plan for maintenance
Leasing commercial property is a little different from leasing or renting residential property. In many cases, the tenant (your business) is not responsible for all building maintenance or repairs.
That isn’t to say that some areas of maintenance won’t still fall under your realm of responsibility–SBA says that’s often your HVAC system, plumbing, etc. Property maintenance is usually taken care of by the property owner or landlord, but make sure you know the expectations.
Really read your lease
This is another situation where a commercial real estate lawyer could be useful to you. Don’t just scan the lease and sign. Have the attorney read over the lease with you. They can make sure you’re in full understanding of the lease and reveal the meaning of any unclear clauses and “fine print.”
Negotiate in your business’ favor
It’s smart to think about negotiating to add some clauses to your lease agreement that will work in your business’ favor. If you’re working with a real estate attorney on leasing commercial property, they can help tremendously with this step.
- Sublease clause
A sublease clause will enable you to sublet your commercial property to another business, should you decide to do so. Even if it’s not in the cards for your business right now, it’s smart to have the clause included just in case things change.
- Exclusivity clause
Putting this clause in place will ensure your landlord doesn’t lease to your competitors. In this article about choosing a location for your business, we talked about reasons being close to your competitors is a bad idea.
- Co-tenancy clause
If you’re leasing property where there’s an “anchor tenant”–a large business that brings in customers–you can ask to include a co-tenancy clause that allows you to break your lease should the anchor tenant close down or move out and is not replaced by another anchor business within a specified time range.