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BFS Capital Blog

Property Leases: What Small Business Owners Need To Know

August 18, 2014

While we know you like reading through legal documents about as much as you enjoy watching congressional proceedings on CSPAN, your lease is one thing you’re just going to have to suffer through. And if you’re not experienced in the world of commercial leases, getting a fair shake isn’t always easy. So, what should you do to make sure that piece of paper you’re signing isn’t going to kill your business?

Before even getting started, the first thing you need to do is acquire the services of a professional. This does not mean your cousin who went to law school and now works part-time flipping condos. It means finding an actual commercial real estate broker who’s familiar with the area and, hopefully your industry. He or she can make sure you’re getting the best deal and point out things in a lease you may not have thought about.

Once you’ve got representation, and you’ve found your dream space, it will then be time to negotiate your lease. The first thing you’ll probably want to consider is the lease’s duration. Yes, we’re all very optimistic that your business will succeed – in its current location – and everyone will live happily ever after. However, in the real world you’ll need to be prepared in the event things don’t work out. The SBA recommends negotiating a one to two year lease your first time around, with an option to renew.

When discussing said renewal, make sure it doesn’t allow for renewals at the “fail market rate,” since you’ll end up paying as much for your renewed lease as any new tenant might. Which, frustratingly, leaves no room for loyalty.

Negotiating The Price

When you hear a business owner complaining about paying $85 for rent, it’s not because he mysteriously landed here from 1895. It’s because that $85 means $85 per square foot, per year, so a 1000 square foot space is costing him $85,000 per year.  And the general guideline for what you can afford should be less than 10 percent of annual gross revenue.

When a landlord quotes you a price, look at the space and see how much of it is usable square footage. If you’ve got an inexplicable 20 square foot crawl space that would probably only be useful if it were a portal to Oompa Loompa land, you don’t want to be paying thousands of dollars for it. So always remember to negotiate in terms of usable square feet.

Also, many leases include paying part of your gross sales to the landlord. Generally that percentage will be low when your business starts out, but negotiate what kind if increase it will see so your new profits don’t get immediately eaten up by the property.

Who’s Responsible For What

Generally, the tenant (that’s you) will be responsible for all build outs or improvements to make a property work for your business. But that doesn’t mean it’s not negotiable as part of your lease. Some landlords will offer build out help in exchange for longer lease terms, higher rent, or other concessions.

Past the initial build outs, you’ll also want to set out who is responsible for further property improvements. Again, this will typically be you, but it is a point of negotiation that can be used to sweeten other areas.

If you’re moving into a new space, negotiate what kind of compensation you’ll get if the space isn’t ready in time because the landlord’s contractors are behind. And along the same lines, establish what will happen if the building becomes uninhabitable for whatever reason. If it’s not your fault, you’ll need to be compensated for your lost business.

Establish who will be required to make improvements and fix broken utilities. Surprisingly, repairs to A/C, water, and a lot of electrical are the tenant’s responsibility in the majority of commercial leases. And even though customers love nothing more than sitting in a sweltering restaurant in summer and listening to you complain about why your landlord refuses to fix it, it’s best to figure that stuff out early.

Finally, you’ll either be signing a net lease or a gross lease. The more-expensive gross lease will include power, water, sewer, common area fees, taxes and pretty much every other ancillary cost of the property. A net lease will not. Either way, make sure you know what you’re getting.

Other Things To Consider

Think about the long-term vision of your business, and make sure the space can support it. Zoning is – from all accounts – figured out by a room full of monkeys with typewriters, and you may find that the Cuban Coffee stand you wanted to open up in your bookstore isn’t allowed by the city.

Subleasing is a great way to make some extra money, so set out a lease that allows you to sublease space if need be. Empty office space is a sinkhole for cash, and if you don’t have a way to monetize it, business will suffer.

And finally, make sure you set out parameters for how the lease can end. If you sign a lease that allows the landlord to terminate it for no reason, there’s really not much point in having a lease at all. But you still want an out if things aren’t going as you’d planned. Similarly, establish late fees and buyout procedures. Because while nobody plans for their business to fail, unexpected lease termination costs can add some serious insult to injury.
Image courtesy of Stuart Miles /