We've been discussing the steps required to open a brick and mortar store. We've
talked about startup plans and finding a location. This week we look at what
comes next in the process: the negotiation and signing of one of the most
dreaded legal document any entrepreneur will ever face: the commercial lease
(insert scary music here).
Before we dive in, understand these points;
there is no such thing as a lease that's in favor of the tenant. Trying to break
a lease is like trying to sweet talk your way out of Alcatraz. Landlords are
your best friends until you miss a rent payment or two. And although I could
find no written record of anyone actually having turned over their first born at
a lease signing, I'm pretty sure it's happened many times over the years. In
fact, there's a rumor that Donald Trump has entire warehouses full of nothing
but his tenants' first born children.
Chances are when you find your
perfect space the landlord will just happen to have a lease in his back pocket
that "all his tenants have signed without a problem." Chances are he'll hold the
lease with one hand and a pen filled with your blood in the other. Chances are
he's banking on you signing the lease without bothering to read it, which many
of his tenants have probably done in the past. I hope the chances are you're
much too smart to do so.
I don't care how many people he says are lined
up to rent the space you should take the lease home and take all the time you
need to review it thoroughly before putting your name on the dotted line. Trust
me, if the space was that hot it would be rented already, so don't let anyone
pressure you into acting too quickly.
Even if you read every word of the
lease yourself have an attorney give it a second look because a lease is a legal
document and as such, is written in a language mere mortals rarely understand.
Forget reading the fine print. When it comes to a lease it's ALL fine print, and
you should always get a more experienced pair of eyes to go over the details.
Here are a few other things to consider before signing a lease.
How is the monthly lease payment calculated? The most basic equation for
calculating a lease payment takes the number of square feet times the cost per
square foot, then amortizes that over a 12 month span. For example, if you have
1,000 square feet and the cost per square foot is $12, the annual lease amount
would be $12,000. Divided by 12 months the monthly lease payment would be
$1,000. Again, this is a simplified scenario. These days most commercial leases
include additional factors that affect the final price, such as a monthly
percentage of your gross sales, property tax and rent increases, operating
expense escalations, common area charges, etc.
Who is responsible for
paying what? It's important that you understand exactly what you are paying for
and what expenses the landlord will cover. Are you responsible for any costs
other than the rent? Are you responsible for paying for your own utilities and
garbage pickup, for example? Will you have to pay for window washing and
janitorial service? Who pays for repairs if the air conditioner goes on the
fritz? Chances are you do. It's good to understand that ahead of time.
Can the monthly payment go up at anytime? It's typical that a lease
contain what's known as an "escalation clause" that allows the landlord to pass
on increased building operating expenses to the tenants. If your lease contains
such a clause you should ask for a cap on the amount the lease payment may rise
over a given period of time and an accounting of the items that are forcing the
increase.
Will my rent increase every year? One very important factor to
know is if and when, and by how much your rent might go up over the term of the
lease. It is expected that rents will increase as property values increase, so
most leases include a rent increase on the anniversary date of the lease.
Plus, if your landlord can rent the space for more than you agreed to
pay a year ago, he is within his rights to ask for the increase. However, it
would be a nightmare if your rent suddenly doubled. You should negotiate the
timelines and amounts of increases before you sign the lease. If your landlord
balks at this find another space.
Is a personal guarantee required? What
happens if your business goes south and you can no longer afford to make the
lease payment? Are you responsible for paying the rent out of your own pocket?
Probably so. Most landlords insist on a personal guarantee from the owner or an
officer of the corporation. This means that even if you go out of business you
are still on the hook for the remainder of the monies owed.
Finally, be
clear on every point in the lease. And if you're not clear on every point get
clarification from your attorney. Exactly how much space are you leasing? What
day of the month is the rent due and what's the extra fee if you're late? Who is
responsible for repairs? What common areas will you have access to? Who is
responsible for maintaining things like keeping the shared restrooms stocked
with soap, towels, and most importantly, toilet paper?
A small detail to
consider, except when you suddenly find yourself without such amenities at the
wrong time.
Tim Knox
Tim Knox is a serial entrepreneur, author,
speaker and radio host and can be reached at http://www.timknox.com
#1 Bestselling
Author of: "Everything I Know About Business I Learned From My Mama"
Disclaimer: All information on this site is provided for informational purposes only! By no means is any
information presented herein intended to substitute for the advice provided to you by any health care or other professional
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