Over several years of being in commercial real estate industry and working with a variety of clients, I found that people who are fairly new to commercial leasing are prone to overlooking are few important things while negotiating their deals. Below are six of the most common mistakes and quick ways to avoid those.
1. Not Negotiating the Lease Rate.
Often new tenants do not realize that commercial rates are highly negotiable. As a result, the price per square foot that you will be paying can vary considerably from the advertised one – which is great! However, in order to get there, you might need to do a little bit of work. My suggestion is to spend some time analyzing and familiarizing yourself with current market conditions and studying average market rates. See how many vacancies currently exist in the area, learn how long properties typically stay on the market, and find out if landlords are offering any incentives (free rent, tenant improvement allowance, etc.). And finally, do not be afraid to make a reasonable offer.
2. Committing to a Too Short of the Lease Term.
While signing a short term commercial lease (1-2 years) might seem like a great idea for a lot of businesses, it can potentially become a mistake. Here are two possible scenarios.
1. The economy is getting stronger and lease rates are going up. If you only signed one or two-year lease, once that term is up, the landlord is free to raise the rent. Even if you decide the leave that location and look for a different option, all market rates would most likely be higher than what you had. Bottom line, if you have found an amazing deal and expecting the market to get stronger within the next couple of years, try to commit to as long of the lease as you possibly can or consider utilizing lease options.
2. You had to make improvements to the property at your own expense. After you invested your hard-earned money into someone else’s property, you might want to have the security of predictable rate for an extended period of time. Otherwise, there is a chance that once the lease term is up, the landlord would raise the rent or decide to sell the property and ask you to vacate.
3. Committing to a Too Long of the Lease Term.
Long term lease commitment can hurt your business quite a bit and not only if your business is not doing as well as you expected. It can also hurt if your business is doing much better than expected, e.g. you are outgrowing the space or seeing the need to have two or more locations instead of just one.
You might also come across an opportunity to purchase a building for your business. Finally, in the even the lease rates go down due to the economic factors, you would be tired up to a higher than new average lease rate.
4. Not Having a Clear Understanding of a Lease Paperwork.
Unfortunately, I have seen way too many tenants signing lease agreements without true comprehension of what they are agreeing to. Yes, most commercial leases are extremely lengthy and incredibly boring, however, you as a tenant need to know exactly what your and landlord’s rights and responsibilities are. Please have an attorney to review the lease agreement and explain it to you! Legal services are not cheap, but the cost of a potential mistake can be very high.
5. Not “Capping” the Potential Expense Amount for Repairs and Maintenance.
Most commercial leases are structured in a way that tenants are responsible for the vast majority of the maintenance and repairs at the property (which is very different from residential leases, where tenants can simply call the landlord once something breaks). Obviously, the larger the property that you are leasing, the higher the cost would be for a potential repair, but even a small space might need an expensive plumbing, electrical, or HVAC overhaul. Having a repair limit – a set dollar amount of the maximum that you would have to pay to fix a problem, would give you a peace of mind and can save you from an unexpected and significant financial “hit.”
6. Not Negotiating the Tenant Improvement Allowance (TI).
Are you planning to make any improvements to the space that you will be leasing, e.g. painting, installing new flooring, updating breakrooms or bathrooms? The landlord might be willing to compensate you for some (or all) upgrades through offering tenant improvement allowance. In more advanced leasing situations, landlords normally hire their contractors to perform the work, but in smaller markets and/or while leasing smaller spaces, TI often comes to the tenant via free or reduced rent. So, while negotiating the deal, make sure to ask if there is any TI being offered.
These are the most common tenant’s mistakes that I have seen in lease negotiations. Of course, the list can continue since there are many things that can potentially go wrong, but luckily there are also many ways to avoid the potential oversights. What are some of the mistakes that you have seen or experienced? We all can learn from those!