Most businesses will either rent or purchase real estate for a retail shop, manufacturing facility, office building, warehouse, or some other facility. But before you move in, it's important to understand zoning laws, the importance of location, how to negotiate a lease agreement, when you should consider consulting an attorney and related matters. This section also includes a primer on choosing a geographical location and a glossary of commercial lease provisions.
Types of Leases
Leases come in many different forms depending on the terms of the lease and the sort of property being leased. Some common leases within a commercial context include:
- Flat or Fixed Leases - a single rental price for a set period of time.
- Gross Leases - a flat monthly rental price without operating costs included.
- Step Leases - a rental with fixed annual increases.
- Cost-of-Living Leases - a rental with variable increases based on inflation.
- Net Leases - a rental with base costs and rent increases as operating costs increase.
- Net-Net Leases - a rental where the tenant pays taxes and insurance premiums in addition to base rent.
- Net-Net-Net Leases - a rental where the tenant pays a base rental plus all operating costs and repairs.
- Percentage Leases - a rental where a percentage of gross income in addition to a base rental cost.
Factors to Consider: Lease or Purchase of a Facility
At some point in a business's life it may be possible to purchase facilities. While this might seem an easy decision to make, there are some considerations that make leasing a superior option, even when acquiring property for the business is affordable. There are certain considerations that can help you make the decision regarding whether leasing or owning is a better option for your business.
Leasing allows a business to conserve its cash flow by limiting the outlay of capital initially. In addition to saving money on an initial investment leasing can often also avoid the cost of maintenance for the property. New businesses may need to be mobile and prefer the flexibility renting provides to rapidly scale the business up or down with the needs of the market. Suitable property may be unavailable, or the real estate market's values may be inflated to the extent that a purchase is unwise. New businesses also frequently struggle to obtain credit since they lack a record of transactions and rent costs can be a valuable tax deduction.
On the other hand, ownership offers long term savings in the form of reduced costs and accrued equity. Ownership also provides better control over the property and a long-term fixed location. Real estate values may be such that the property itself accrues value that can then be accessed on the business's behalf and depreciation to the property and interest on the financing of its purchase may provide some tax advantages.
Commercial Zoning
Zoning dictates the sort of activities that may take place on a property. Zoning laws may control the noise level, waste management, the appearance of the building (its height, size, and setback from the street), parking, and air quality. Before signing a lease it is important to ensure that property is zoned appropriately for your business's needs. Just because the previous occupant used a property for a specific purpose does not mean that the new occupant can safely assume they are permitted to do the same thing.
When zoning laws change a business that is noncompliant may be permitted to continue its activities, however the right to this non-conformance may not pass to the next tenant. Prior tenants may have applied for a variance for their activities, though this too is limited to the applicant, not future businesses.
