A commercial lease can have a big impact on your business, especially in San Diego. A good lease can save you a lot of money and protect your business; a faulty lease can drain your business of resources, and, if something goes wrong, it can put you in the red. Real estate leases are a vital part of a business, but they have their risks. Cover all your bases by following these steps, and ALWAYS consult an attorney before entering into a contractual agreement.
Define the Space
When the tenant does not have a clear understanding of the space they are actually renting, problems arise. Because of repairs and remodels over time, the interior space of a building often changes.
Not knowing the accurate square footage of your space can be costly. It is important to know the difference between useable areas and common areas (elevators, hallways, lobby). The rent for common areas is referred to as a “multiplying factor” in addition to useable space. If you have a very small operation (a couple of employees), you might not be using the common areas very much. You may be able to negotiate down the multiplying factor and save money.
Look into Comparable Rental Options
Finding other properties that are similar to the one you are considering can be a strong negotiating point. This gives you the advantage of negotiating pricing, benefits, and services with landlords. They want your business, and are often willing move contractual agreements around to get it.
Operating Expenses
Operating expenses in this case are NOT your business operating expenses, but ones that are specified in your lease. This tends to include utilities, taxes, maintenance, landscape and repairs. Make sure that you know exactly what is included in this category, and negotiate anything that is not pertinent to your business or needs. A landlord will often use a “base year” calculation for this, which can be set by a year that you were not even using the space. Always read the fine print!
Escalation Clause
An escalation clause allows increases/decreases in prices under certain conditions. They are fairly standard, and if not approached carefully, can drain you. If a landlord is particularly aggressive and a tenant is naïve, this clause can result in a massive cost build-up over time. Be aware of these numbers and negotiate a cap to control the cost.
Tenant Improvements
‘Tenant improvements’ are types of improvements (provided by the landlord) that are included in the leasing process for a new tenant. Be sure to check what building improvements your lease is willing to allow under the ‘tenant improvement’ criteria to save out of pocket spending.
If structural improvements are necessary, try to negotiate with your landlord to cover those costs.
‘As Is’ Delivery
While some commercial leases offer tenant improvements, others (more frequently) cite that tenants acquire the property ‘as is’. This means that any existing problems (structural or otherwise) are the tenants’ responsibility. If you cannot negotiate warranty protection for structural problems in the property, have a professional perform an inspection of the property/building before you sign a lease.
Co-Tenancy Clause
In shopping centers, strip malls, or areas with multiple businesses, you might have a ‘key tenant’. In these cases, you may be able to negotiate a co-tenancy clause that allows you to terminate your lease (without penalties or with lesser penalties) if a key tenant leaves or closes.
As a small business owner, location is critical to your success. Always consider your neighbors and whether they can hurt or benefit your business before you sign a commercial lease. Remember to also consider your parking options in large business areas (is parking provided in the lease?).
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