Your first commercial lease can be the first good business decision you make, or it can be the mistake that drags your business down.
To be more specific, going into the lease negotiation process without any expertise or advise is a mistake. There are simply far too many things that you don’t know, and far too much at stake.
Unfortunately, small businesses go out of business every day because they got stuck with an unfavorable lease. Here are some of the most common reasons.
The Triple Net Lease
Of all the types of commercial lease agreements you need to know about, the triple net (NNN) could be the most dangerous. It can be tempting with illusion of saving money on monthly rent. However, in exchange for that price, you are agreeing to pay other fees that come along with this space.
This may include:
- Taxes
- Utilities
- Upkeep, maintenance, repairs
These costs can easily surpass any savings that you see from your rent, and even exceed what you’re paying in rent. Many have said it’s all of the burden of owning your own building, without any of the independence or equity.
A Lack of an Exclusivity Clause
If you have never negotiated a lease before, you may not know what an exclusivity clause can do to protect your business.
Let’s say you open a coffee shop and artisan bread bakery in a strip mall. You’re doing pretty well until you receive word that a Starbucks is opening up in the end unit. This could absolutely destroy your business.
An exclusivity clause would prevent your would-be landlord from leasing out other spaces to businesses that may directly compete against yours. This is almost a must in malls or shopping centers.
Paying Too Much Out of Pocket on Upgrades
Your space will likely not be perfect and move-in-ready on day one. You might have to invest a little money in it to get it where you need it to be. To help you with this, the landlord may be offering tenant improvement allowance, which seems great. However, you can do better.
A tenant improvement allowance involves you paying out of pocket for your upgrades, submitting your receipts, and getting reimbursed after the fact. This can actually lock up your cash flow for a month or more if you’re doing major upgrades.
A straight-up cash allowance would be better. This way, you’re simply receiving an agreed-on amount of money per square foot every month. This money is simply yours to use how you see fit and you can keep the cash flow moving.
Those are only 3 of the things that may be hidden (or at least not discussed) in your first commercial lease. There are far, far more. Again we really recommend you have someone with extensive experience with these types of leases look everything over for you.
If you can’t afford a real estate lawyer, that’s fine. There are far less expensive commercial lease experts who can ensure that you’re getting a fair shake.
This is the first big decision your business will make. Make sure it’s a good one.