In 2021, the commercial leasing business was valued at $153.4 billion.
With such a high value, you need to make sure that you know everything you can about the industry before you sign a commercial lease agreement.
Taking a few minutes to read over these tips could actually help your business save you some money and stay out of bad leases.
So keep reading to find out how to sign a lease!
1. Research the Landlord and Building Owner
Research the landlord and the owner of the building before you sign anything. Sometimes you’ll find out that the direct landlord isn’t even the actual owner of the building.
You should meet both of them (if applicable) because you’ll be entering into a business relationship together.
Before you sign a lease, you should make sure that you can actually get along with them and want to work with them.
You should also try and figure out what their financial standings are like and if they’re good at making payments on time.
You should search public records online to find out as much as you can about the landlord. You may also want to request any documents that are related to their business to learn more about the landlord.
You want to ensure that they make payments on time because in some states if a landlord doesn’t make payments to the building owner, the tenant or business in the building could end up being evicted.
This can happen even if you’ve been making your payments on time!
2. Be Aware of Fees
Commercial landlords will often give you a quote for one price for the property rental.
After that price, they’ll add on other fees for garbage pickup, housekeeping, landscaping, security, and other amenities. These fees can quickly add up and take you by surprise.
Sometimes these taxes are called TMI taxes, standing for taxes, maintenance, and insurance. You can look for these fees in the small print of the commercial leases.
The rent might not change, but these fees could end up increasing.
The landlord can actually increase these fees whenever they want, and they don’t have to give you any warning.
3. Budget for Any Capital Expenditures
After you’ve figured out how much your fees will be at the beginning of the lease, you should also check to see what kind of lease you’re agreeing to. Figuring out which type you’re signing will help you budget appropriately.
A full-service lease is when the landlord will cover all of the property insurance, utilities, taxes, maintenance, and janitorial services. However, these rent rates normally need to be higher.
However, these leases can be more predictable, which allows you to create an effective budget. These are also the most common type of lease.
Modified Gross Lease
The modified gross lease is similar to a full-service lease. That means that there is a fixed rent, but there is one single fee that you’ll be charged.
This fee covers taxes, property maintenance, and insurance. However, this service fee will be fixed for the rest of your lease, and the landlord can’t increase the fee even if the expenses go up. But this fee and rent can go up if you renew your lease.
A net lease is when the tenant will cover most of the additional expenses. These expenses and fees will be paid in addition to your rent, and you’ll have to pay them to your landlord.
However, the landlord can raise or lower the fees during your lease. The commercial tenant will reimburse the landlord according to the single, double, or trip net lease.
If you’re in a single net lease, then you’re responsible for paying the landlord for a certain prorated portion of the taxes on the property.
If you’re in a double net lease, then you’ll have to pay the prorated property tax as well as your portion of the property insurance.
Lastly, a triple net lease will give you the lowest rent amount. However, the expenses will change which makes it more difficult to set a good budget. These are common leases for restaurants and storefronts.
4. Learn the CAM Terms
You’ll also find a lot of CAM terms in your lease. CAM stands for Common Area Maintenance. You should make sure that you set aside a percentage of your money to pay for these fees.
This can be one of the most confusing sections on the lease, and you’ll realize that you’ll have to pay a lot in fees.
These fees are normally based on what percentage of the building that you’re renting.
You should make sure that the percentage is based on the overall size of the building rather than what percentage of the building is being rented out at any point in time.
You should also read over the lease to ensure that you’re not paying for anything that would help the landlord, like their marketing efforts or their own legal fees when discussing leases with other tenants.
You should also make sure that you don’t pay administration fees that are over 3%. Thankfully, the CAM terms are one of the things that are open for negotiation.
CAM Stop Lease
To avoid paying a lot of fees, you could also ask your landlord if they’d be willing to write a CAM Stop lease. This means that you’ll only pay for any increases in the fees above the initial lease year.
So if you’ve stayed there for five years, you only have to pay the difference in CAM fees of what they are now versus what they were your first year.
This can help to take out some of the fluctuations with your budget. Sometimes you can also ask for a cap on the CAM rate so that you know you won’t have to go over your budget.
5. Research the Zoning Lease Laws
Your landlord can say that they want their building to be a space for a restaurant, but you should make sure the zoning laws in your area actually allow that.
While the landlord may not be aware of rules, they could lease you a space that won’t work for your business.
When you align these two details and find out that you can run your restaurant in that business, you’ll save yourself a lot of lost time and money in the future.
6. Talk to a Lawyer
If you sign the wrong commercial lease, you’ll be in a lot of problems, and they’re very hard to break. That’s why having a lawyer from Freedom Law with you before you sign a lease can really help you out.
They’ll be able to read the lease and also understand what it’s asking for. If they say that it’s good to go, you can trust that it’s a good lease and your company’s interests are protected.
7. Research the Deposit and Requirements
Like residential leases, you may have to put down a deposit as well. In commercial leases, the most common deposit is a damage deposit.
That means you’ll walk through the premises that you’ll be renting out. Make a note of all the broken items or damages. Try and take photos with time stamps if you can.
You should keep a copy of the notes and photos for your record, but you’ll also have to give one to the landlord.
Having this evidence could help you get back your deposit at the end of your lease.
In general, once you’re going to leave the place, your landlord will have to return your deposit within fifteen days if they don’t intend to put a claim on your deposit.
However, they can also decide to give you written notice of how much of your deposit they’re keeping and also explain why. They have thirty days to do this, and they’ll have to send it by certified mail to you.
If they don’t send it within thirty days, they lose their rights to claim your deposit.
After you get any notice, you’ll have another fifteen days to write them back an objection. If you don’t object, this will automatically be deducted from your claim, and you’ll get the balance that is left over.
As a general rule, you should never accept the first terms that the landlord offers. There’s always room for negotiation, especially when it comes to fees and costs.
Even if you fall in love with a property, be prepared to walk away if the landlord won’t negotiate or if it’s too out of your price range.
Plus, when the landlord knows that you’re willing to walk away, you have higher bargaining power.
9. Write a Letter of Interest
Unfortunately, the commercial property market is very competitive right now. Because of that, you need to find ways to stand out amidst the other possible buyers. One way to do that is by writing a letter of interest.
This helps to show that you’re willing to put extra effort into renting their space, which is appealing to many landlords.
When you write a letter of interest, you should include the name of your business and what you do, how many years you’ve been in business, what type of lease you’re looking for, how long you want to rent, and what your pricing is,
You should also mention the key factor of assignability, especially if you’re going to sublet your place. Also, let them know if you want to make improvements to space. Sometimes landlords will give you a credit on their rent if their space is improved.
10. Check the Termination Clause
When you’re reading the lease, check to see if the landlord can terminate your lease. Normally this happens if you ask for an assignment, which means that you’d have the right to have someone else take over your lease in place of you.
However, a landlord might not be as willing to do that, and they’ll try and renegotiate terms. Instead, they may just terminate your lease, leaving you with a lot of money at risk.
11. Learn About Nuisance Laws
A lot of leases also have clauses on how much of a nuisance your business can cause. For example, you can only make so much noise, have certain smells, or even use certain equipment.
For example, if you’re going to sign a lease for a restaurant, you might have to negotiate on the odor stipulations.
However, a smell is so subjective, and especially for a restaurant, you don’t want to find yourself drowning in fees because your chef wanted to experiment.
You should also look into what the environmental laws are for the property. Many landlords don’t even think about this, so cover yourself and learn all you can about them so that they don’t get used against your business.
12. Put a Business Structure In Place
Lastly, put up a corporate structure to help protect yourself as well. You should File for an Articles of Incorporation if you’re a corporation. If you’re not, make sure that you have an Articles of Organization.
Most LLC businesses receive this from the Secretary of State. Both documents are important to have in hand before you sign any lease.
Discover More About What to Know Before You Sign Your Commercial Lease Agreement
These are only a few things that you should be aware of when you sign a commercial lease agreement, but there are still many more things to keep in mind.
We know that running a business can be stressful and difficult at times, but we’re here to help you out.
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